Zynga's Drawn to Danger

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Investors didn't appreciate Zynga's (NAS: ZNGA) move to overpay for Draw Something creator OMGPOP. Will they applaud now that Zynga is turning to a company that draws for a living?

The social gaming giant hopes that a revenue-padding marketing deal with DreamWorks Animation (NYS: DWA) will help remind the market that big deals are possible when you have a wide enough audience.

DreamWorks Animation wants to promote Madagascar 3: Europe's Most Wanted, which is hitting theaters in two weeks. Paying Zynga for posting display ads and promoting video trailers for the computer-rendered flick may seem like obvious marketing moves, but Zynga's Draw Something offers advertisers something that other promotional outlets do not: a starring role.


Draw Something is a Pictionary knockoff with a social gaming bent. Players get a choice of three words and then have to draw one using a limited number of colors. Don't be surprised if some of the Madagascar animals -- or even some of the countries featured in the movie -- begin to pop up as word choices.

Sponsored word choices? Talk about the mother of all product placements.

Zynga hinted at this tactic earlier after shelling out $183 million for the game maker. It sounds smart. The rub is that engagement metrics for the game are trending lower. Usage on Facebook (NAS: FB) is slipping, and that's huge since Zynga went from making up 12% of Facebook's revenue late last year to 15% during the first three months of this year.

The title's popularity also seems to be fading on mobile. As of this morning, the game that was once on top of Apple's App Store chart is now down to No. 25 for the free ad-supported version and No. 14 for the premium $1.99 version.

Zynga apparently bought OMGPOP just as Draw Something was peaking. It was easy to see this coming. Anyone who has played the game even casually knows that it's a mess. Drawing can be a chore on small smartphone screens, and a lot of people just cheat by scribbling the words that they're supposed to be depicting.  

The silver lining for Zynga investors at this point is that the stock has shed nearly $5 billion in market cap since the $183 million purchase of OMGPOP, so obviously this is no longer a case of the company overpaying for an acquisition.

Zynga is also striking deals that may seem silly to the outside world -- like today's DreamWorks Animation deal and its recent partnership with American Express (NYS: AXP) that will reward credit card swipes with Zynga's virtual currency -- but they do validate the model.

It's a wild world out there, but a caged Zynga isn't ridiculously overvalued anymore.

Gnaw something
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At the time this article was published Motley Fool newsletter serviceshave recommended buying shares of DreamWorks Animation SKG.Motley Fool newsletter serviceshave recommended creating a write covered strangle position in American Express. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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