Why Zynga Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of online social games operator Zynga (NAS: ZNGA) plummeted 18% today after slashing its 2012 outlook for the second time.

So what: Today's bleak quarterly forecast -- management expects a third-quarter loss due to a decline in paying users, as well as costs related to its purchase of OMGPop -- coupled with yet another full-year cut, naturally reinforces concerns over the sustainability of Zynga's business model. Facebook (NYS: FB) , which generates more than 10% of its revenue from fees paid by Zynga, is also falling on the news as analysts lower their payments estimates for the social networking giant.

Now what: Management now sees 2012 EBITDA of $147 million-$162 million, down significantly from its prior view of $180 million-$250 million. "We're addressing these near-term challenges by implementing targeted cost reductions in the fourth quarter and rationalizing our product R&D pipeline to reflect our strategic priorities," Founder and CEO Mark Pincus reassured investors. "We remain optimistic about the opportunity for social gaming and the power of our player network of 311 million monthly active users." Given Zynga's clearly faddish and speculative nature, however, I'd remain highly cautious about buying into that bullishness.

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The article Why Zynga Shares Plunged originally appeared on Fool.com.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook. 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 Fool's disclosure policy always gets a perfect score.

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