Zynga’s turnaround comes to an end and moves into growth mode

Everyone loves a comeback story — this one’s about Zynga, the mobile game creator.

On Feb. 10, Zynga reported its fourth-quarter earnings report:

• $616m in sales up 61% from the previous year
• 36m average daily mobile users, growth of 77% from the previous year

The era of mobile gaming

Mobile gaming grew to an $85b industry in 2020 — making up 51% of the total $165b gaming market. Hyper-casual games — those that are easy to understand (i.e. Flappy Bird) — have grown the fastest of any mobile gaming categories. It’s not just consumers that love these apps, game developers do as well for good reasons:

• Easy and cheap to develop as these games typically only take a handful of people to make in a shorter period of time.
• Easy to monetize by making them free and filling them with ads.

One company is looking to build an empire with mobile games… Zynga, the creator of FarmVille, went public in 2011 with an overly hyped IPO, only to struggle the next 5 years with declining sales.

In 2016, Frank Gibeau, a veteran gaming executive from Electronic Arts, was brought in as the new CEO to turn around the company — Zynga’s stock is up 410% since.

• Before turnaround: losing hundreds of millions of dollars with flat/declining sales growth.
• After turnaround: becoming profitable in 2019 with growth of 45% and 49% in the past 2 years.

From turnaround mode to growth mode

For the first time in a decade, Zynga is back in growth mode. The new strategy — acquire game studios and build a portfolio of “forever franchise” of games that can be played for 5+ years and generate over $100m/year in sales.

In the past 4 years, Zynga spent over $3.1b acquiring 8 different game studios. As part of the Zynga brand, each studio can focus on developing hit games while relying on Zynga’s expertise to acquire and monetize users.

Here’s what Gibeau has his sights on…

• Expanding games cross-platform where users can play games across multiple devices — which could expand Zynga’s potential market size.
• Acquire other game companies with its $1.3b in cash — a move that will grow its sales and expand its roster of games.

For investors… The only way to stay relevant

Mobile gaming is a “hits” based industry and the success of new games is critical to growing revenue. Large organizations have been notoriously bad at innovation but the “new” Zynga has taken a different approach — acquiring studios and increasing its chances of developing potential hits.

But if Zynga fails to continue producing hit games, it could revert back to the Zynga in its early days — a struggling business.