Investors Don't Get Zynga

Mr. Market finally invited Zynga (NAS: ZNGA) to a game called Investing with Friends on Friday.

Shares of the social gaming giant moved 5% higher on Friday -- and continue to ascend today -- after the latest round of gaming data showed a cruel December for traditional video game companies.

Media tracker NPD Group's data for last month is brutal. Industry sales fell 21%, fueled largely by a 28% plunge in hardware sales at the retail level, but also stung by a 14% slide in software.

Shares of Activision Blizzard (NAS: ATVI) and GameStop (NYS: GME) fell 2% and 3%, respectively, while Electronic Arts (NAS: EA) led the losers by falling nearly 8%.

Critics will argue that NPD's data is incomplete since it focuses primarily on new sales at the bricks-and-mortar level. Ignoring the sale of used games isn't going to matter to Activision Blizzard and EA. They don't see a dime of the resale money. However, this clearly is a big part of GameStop's business. The small-box retailer makes its juiciest margins by reselling trade-ins.

NPD's numbers also don't cover digital sales, an area where EA and Activision Blizzard are thriving.

However, the market's assumption that what's bad for GameStop is good for Zynga doesn't make sense.

Zynga went public last month at $10 a share, but it has closed in the single digits every single day. It certainly didn't help that analysts pegged the stock's fair value as low as $6 before the IPO even hit the market.

Zynga is profitable -- unlike many of the other busted IPOs that went public in 2011 -- but this doesn't mean that the social gaming speedster is worth its current $6 billion market cap.

The same level playing field that helped grow Zynga into a sensation with FarmVille is also open to developers big and small. We really don't know if Zynga will be able to keep its popularity growing, as proven by the failure of Mafia Wars 2 to gain traction after the original Mafia Wars was a hit.

The NPD data doesn't tell us anything that we didn't already know. Folks aren't buying new games the way they used to. The real story is how we're engaging with older games through multiplayer online game play and how the smartphone, tablet, and Facebook revolutions have opened the playing field to a large number of companies reaching out to a very fickle gaming audience.

Sure, send the gaming stocks lower -- but don't give Zynga a free pass here. It will have to earn it, and so far it hasn't.

Even though the next trillion-dollar revolution will be in mobile, it may not involve Zynga. A free special report will get you up to speed.

At the time thisarticle was published The Motley Fool owns shares of GameStop and Activision Blizzard. The Fool has also written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard. Motley Fool newsletter services have also recommended writing covered calls in GameStop and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.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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