Why Zynga's Stock Has Wilted in 2012

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The first half of 2012 is in the rearview mirror, and investors are gearing up for what looks to be an action-packed ending. There are bound to be some big winners -- and more than a few duds -- no matter what happens in the United States and abroad.

Will your favorite stock have its victory lap as we hit the home stretch, or will it get passed by? First-half performances can hold some clues, so let's look to the recent past to find out whether Zynga (NAS: ZNGA) deserves a place in your portfolio going forward.

First-half recap
Zynga has been one of 2012's worst-performing stocks, although investors entered 2012 on the rise. Despite an early 50% gain, Zynga's now shed nearly half the value it had on the first trading day of the year.


ZNGA Total Return Price Chart

ZNGA Total Return Price data by YCharts

Here are a few financial snapshots of its recent performance:

Market Cap$3.8 billion
Trailing 12-Month Revenue$1.22 billion
TTM Net Loss($491 million)
TTM Free Cash Flow$136 million
Most Recent Quarter Revenue$321 million
MRQ Net Loss($85 million)
MRQ Free Cash Flow$41 million
MRQ Revenue / Net Income Y-o-Y Change32.1% / (600%)
P/E and Forward P/ENM / 48.6
Price to Free Cash Flow27.9
Motley Fool CAPS Rating (out of 5)* (find out more)

Source: Morningstar. NM = not material because of negative earnings.What the numbers don't tell youThe story of Zynga's year is very much linked to the story of Facebook's (Nasdaq: FB) enormously hyped IPO. It's only appropriate, since Zynga and Facebook have such a symbiotic relationship. Facebook's first S-1 filing sent Zynga skyrocketing, as the social network revealed a surprisingly deep reliance on Zynga's browser games.

Despite that acknowledgement, Zynga's first earnings release as a public company underwhelmed investors. The company shook off that setback long enough to make its 2012 high at the start of March, when it announced its own games platform in an effort to strike out on its own, without Facebook. That was the end of Zynga's brief and somewhat unexpected ascent to a 50% gain, and shares have been in freefall ever since.

A secondary offering, largely an excuse for CEO Mark Pincus to unload a lot of shares, not only diluted the small IPO float but also sent the wrong image of a leader cashing out early.

Zynga's first-quarter results beat the Street's expectations but also showed the start of a slowdown in user growth rates. To fend off the appearance of stagnation, Zynga spent $200 million on one-hit-wonder game developer OMGPOP, which briefly held the coveted top spot in Apple's (NAS: AAPL) App Store.

Since the purchase, OMGPOP's Draw Something has faded fast, and one of its developers walked away from a job at Zynga's offices, calling the company evil and actively destructive. Ouch. Zynga's CTO also left for a gaming start-up last month after falling in love with its technology, strengthening the firmly planted public image of Zynga as a place where nothing matters but the relentless pursuit of monetization.

That's not to say that Zynga hasn't made any positive moves. The company forged a partnership with Hasbro (NAS: HAS) for the latter to develop real-world toys and games based on Zynga's virtual toys and games. Zynga also collaborated on a branded American Expressprepaid card, which pays users back with Zynga currency rewards for real-world purchases. A marketing deal with DreamWorks Animation (NYS: DWA) may offer a brief revenue boost as well.

Nothing's worked to reverse the stock's slide. Zynga's dawdled near all-time lows for a month, and its big "Unleashed" press event was a Hail Mary pass that went wide.

We at the Fool have warned investors about Zynga's false promise since its IPO. Rule Breakers analyst Tim Beyers calls Zynga a classic "Faker Breaker," a stock that just doesn't deserve its hype. I and my fellow contributors Travis Hoium and Sean Williams were unanimous in our thumbs-down vote on the stock this April, which is a relative rarity in our long-running Top Stock series.

Looking for a real Rule Breaker? You can get one great recommendation, straight from Fool co-founder David Gardner, in our free report on "The Next Rule-Breaking Multibagger." Don't wait until it takes off (again). Get the information you need for a great buy right now. Or if you're interested in learning about the potential opportunity and risk for one of the most interesting names in tech, grab your copy of the Fool's brand new premium research report on Apple.

At the time this article was published Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter,@TMFBiggles, for more news and insights. The Motley Fool owns shares of Facebook, American Express, Apple, and Hasbro.Motley Fool newsletter serviceshave recommended buying shares of Apple, DreamWorks Animation SKG, and Hasbro, creating a write covered strangle position on American Express, and creating a bull call spread position in Apple. We Fools don't 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. The Motley Fool has adisclosure policy.

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