Comment by Aethaeryn | Hacker News Reader

Comment by Aethaeryn | Hacker News Reader

Parent Full thread

Please do not be a contrarian who buys ZNGA. You will probably lose money.

They have 3,000 employees,[1] even though their business model revolves largely around cloning[a] games that are simple enough for very small teams to create.[2] They're losing money; their EPS is -1.30.[3][4] Just because they have cash from investors doesn't mean that the business model will make significant money in the long run and it's made more complicated by the fact that they have a very heavy dependence on Facebook.[5]

They're also dependent on casual gamers (who don't have much loyalty or will to pay) and current trends.[b] Apparently, only 2% of their customers pay for their games.[5] Their stock market valuation seems largely mapped to their active user count[6] (and also Facebook's share prices[5]) rather than their financials.[c] In fact, I can't even say that they're overvalued because that involves looking at the P/E and with a negative EPS, I can't really do an apples-to-apples P/E comparison of Zynga against companies that are actually listed as profitable. Is a -3.8 P/E overvalued?[4] It certainly is risky!

-----

[a] They also buy some companies behind popular games too, like OMGPOP. This isn't necessarily a good idea.[7]

[b] The use of the term "game craze" in the title of the parent article implies that part of the reason ZNGA has a valuation in the billions is because of the current trendiness of Facebook games. The problem with relying on trendiness for investments is that when there's something even trendier (i.e. mobile apps), all the investor money that chases trendy stuff could simply go there instead.

[c] It was a popular dot-com bubble plan to focus on market share with a free product at a sustained financial loss.[8] Of course, it's too early to tell if ZNGA will sustain its losses in the long run because its stock is too young. Still, it's very risky.

-----

[1] https://en.wikipedia.org/wiki/Zynga

[2] https://s3.amazonaws.com/nbpromo/dearzynga.jpg

[3] http://www.google.com/finance?q=NASDAQ:ZNGA

[4] http://data.cnbc.com/quotes/ZNGA

[5] http://beta.fool.com/buffettbeater/2012/06/11/dont-get-zynge...

[6] http://www.marketwatch.com/story/zynga-falls-on-ugly-faceboo...

[7] http://www.forbes.com/sites/insertcoin/2012/05/04/draw-somet...

[8] https://en.wikipedia.org/wiki/Dot-com_bubble#Bubble_growth

Well their 180 day lockup is about to expire as well. I would fully expect some folks to liquidate next week, perhaps this is in anticipation of that.

One of the weird things about World of Warcraft was that there are (or were) folks who would sort of hang out in that world just to socialize and sometimes, perhaps, go out and kill some stuff. The 'hanging out' part was key, and I am convinced that if Blizzard could figure out a way for folks to sit down and play cards or checkers or something it would be popular.

People like to sit around and socialize, and if they can do it with an 'excuse' like a game of cards or a table top game, well that is just icing on the cake. I don't think Zynga has quite got the formula down yet but when they do, or someone does, you will see the rise of the 'Grandma chat rooms'.

  > The 'hanging out' part was key, and I am convinced that if
  > Blizzard could figure out a way for folks to sit down and play
  > cards or checkers or something it would be popular.

The problem with Zynga is that they built up casual games around a general purpose social network. I agree that social-oriented minigames would provide a much better user experience if they were built around a larger game environment, like a high-quality MMO. People who form groups in games want to be able to socialize, so social mini-games built around such a game is a good idea.

Another advantage, of course, is that you don't necessarily have to tie your full real life identity to your social identity. This allows people to be freer about what they can say or do, and might be more appealing.[a]

-----

[a] Yes, an argument can be made that attaching one's RL name to a post makes abuse less likely, but I believe that effective moderation of a community is a much stronger factor in having a quality community than simply requiring real names. I've seen places on the Internet where people were happy to flame using their full name and identity because of no moderators. On the other hand, HN is a good example of a civil online environment where real names are not required.

My understanding with Zynga speculators is that the US may soon legalize online gambling and that Zynga is well-positioned to take advantage if that happens.

If someone is telling you that the US 'may soon legalize online gambling' then you are not listening to someone who understands US policy making. I expect that the US will legalize marijuana before they legalize gambling, and making pot legal is at least a decade away, maybe two.

The reasoning is two fold, first gambling is considered a 'sin' by many religions (which is why Las Vegas was sometimes called 'sin city') as was same sex marriage. There is a chance we will finally clear the way for same sex marriage after a decade of staunch resistance by religious interests, and if they 'lose' that fight they will certainly try to draw a line in the sand with gambling. These same interests have been trying over turn the right to privacy ruling which made abortion legal.

EDIT: add reasoning.

Uh, gambling is legal all over the U.S. now. There are casino's and off track betting all over the place, keno in bars, lotto tickets and scratchers in every convenience store and supermarket. Do you actually live in the U.S.?

The issue with online gambling is that in its previous form, when it was finally and fully outlawed in 2006, the Federal and state governments weren't getting their cut of the take and many people weren't reporting winnings to the IRS.

Its not especially a moral or religious issue now, its more a taxation and revenue issue. The House Financial Services Committee approved a bill to legalize online poker and some other forms of online gambling in 2009, it just hasn't made it all the way through Congress yet. I imagine there will be some Republicans opposed to it on religious grounds but once Congress figures out how to tax and regulate it and how much revenue they can rake in off it, it will be back.

Types of gambling are legal all over the U.S.: betting on horse races, for historical reasons, and state/regional lotteries (which includes "scratchers").

Keno and other forms of gambling are legal only in Atlantic City and Nevada, for historical reasons. Gambling is not illegal in reservations but "indian" casinos are generally subject to approval by the federal government.

Congress has known for decades how to tax gambling revenues. They have simply chosen not to do so. Generally, the justification for not legalizing gambling nationwide is that the tax revenues raised from gambling activities is far outweighed by the increase in crime and decrease in properties values.

Congress chose to outlaw online gambling in 2006 as a result of many, many individuals developing chronic gambling addictions that destroyed their own lives and the lives of their families. The alternative was heavy regulation, but the casino industries (Vegas, Atlantic City, and various tribes) fought against it.

This is just incorrect

Gambling is legal throughout the country to varying degrees in various forms. Black Hawk, Colorado has legalized gambling up to $100 per bet, for example.

Gambling is illegal nationwide under federal law, except where specifically excepted. Horse races, Nevada, and Atlantic City are specifically excluded from the gambling prohibition, and indian reservations do not fall under federal jurisdiction. Sports-gambling is also illegal nationwide, except that bets may be placed anywhere to Atlantic City or Nevada sportsbooks (and for this reason, almost all sportsbooks are located in Nevada).

If gambling is going on in Black Hawk, CO, it is not "gambling" within the legal definition of the term or it is not legal. Alternatively, it may simply be an office for a (legal) sports-book operation that operates out of Nevada. Chances are, however, that it is not a legal operation and simply does not do enough business to warrant federal resources.

No it is not. Gambling is legal under federal law and is left up to states to decide restrictions. You are just flat out uninformed.

Wikipedia is wrong on this subject, unless you greatly expand the legal definition of gambling. The gambling prohibition passed around the same time as the alcohol prohibition, but survived because it grandfathered existing gambling locales (Nevada, Atlantic City, Washington, and Delaware, generally, though the latter two have since outlawed or restricted gambling.)

This is why there are no casinos (other than indian casinos) outside of Nevada, Atlantic City, and reservations. Do you really think that California wouldn't have a billion casinos (in addition to the Indian Casinos) if they weren't prohibited from doing so by federal law?

Gambling generally means any wager for cash, where skill does not play a role in the chance of winning the prize. Skill generally applies to intermediate steps en route to winning, not "skill" in selecting the prize-winning item. This includes lotteries and horse racing, but these forms of gambling are specifically excepted from the gambling prohibition. Most traditional casino card games are considered games of "skill" rather than gambling, which is why card houses are legal (subject to local restrictions).

Sports books are legal, so long as they are based in a state where gambling was legal when the gambling prohibition took affect.

You are incorrect. Casino gambling is entirely state regulated, there is no Federal law controlling it. More and more of them are allowing it because its an easy way to boost their tax revenues without raising income and property taxes.

The Mississippi gulf coast has had casino gambling since the 1990's when it was authorized by the state, http://www.worldcasinodirectory.com/mississippi.

Colorado voters legalized casino gambling in BlackHawk in the 1990's as well, http://www.blackhawkcolorado.com.

Detroit legalized gambling in the 1990's, and a number of state legalized it on riverboats on the Mississipi in the 90's as well.

The Federal laws on the subjects mostly apply to interstate gambling enterprises which is where they do have jurisdiction, in particular sports betting and the 2006 law which outlawed online gambling primarily by preventing banks from transferring funds to and from online gambling sites.

The idea of marriage as a sacred rite and institution is far more universal and fundamental to Christianity than prohibitions on gambling. I don't think your model of Christianity is very good.

Illinois now lets you purchase lottery tickets (including the multistate Mega Millions and Powerball games) over the net using a credit card.

One step at a time. And only a matter of time before the 72 hour lottery pool morphs into millisecond real time gambling.

If US really legalizes online gambling Zynga is not the best play. IMHO MGM Resorts (MGM) or Las Vegas Sands (LVS) are better plays if you are bullish.

>One of the weird things about World of Warcraft was that there are (or were) folks who would sort of hang out in that world just to socialize and sometimes, perhaps, go out and kill some stuff. The 'hanging out' part was key, and I am convinced that if Blizzard could figure out a way for folks to sit down and play cards or checkers or something it would be popular.

Some of the most popular WoW UI mods were popcap-developed versions of Peggle and Bejeweled. Poker mods also were fairly popular.

Not sure if any of them still work, though.

Looks like ZNGA's lockup period has already expired:

http://www.ifre.com/equities-zynga-insiders-race-to-cash-in-...

"IPO underwriters controversially agreed to early waiver of a lock-up agreement preventing insider selling within 165 days of going public"

So lock-up expired May 28.

2% of customers paying is pretty average for a free-to-play model. If Zynga has 60 million daily active users, thats 1.2M payers per day, more than enough to be profitable you'd think.

The real question is the value of their users, and whether Zynga can increase that value. Zynga's largest expense is probably marketing and CPI costs have more than likely doubled (I don't know the exact numbers) on Facebook over the past couple years. If Zynga hasn't increased the value of their users, that means they can acquire less, thus the drop in DAU.

The key equation for a free-to-play business is LTV > Acquisition. Unfortunately, CPI for FB probably somewhere around $1 and on iOS it can be $1-$5 depending on who's buying the traffic that day. This is why the social game market is difficult to survive in, because most small companies don't have the marketing spend to acquire customers at that cost. For Zynga, these costs are starting to show in reduced DAU, due to a combination of natural declining retention and an increase in acquisition costs.

Reply on news.ycombinator.com