Zynga swearing off real-money gambling a good move, analysts say

Zynga Inc. is kicking the gambling habit.

The social gaming company had been trying to get into the online betting business as revenue from Facebook games weakens, but on Thursday Zynga said during its second-quarter earnings report that it would not pursue a gaming license in the U.S. after testing the waters in Britain.

“While the company continues to evaluate its real money gaming products in the United Kingdom test, Zynga is making the focused choice not to pursue a license for real money gaming in the United States,” the company said in a statement.

Many investors had bet their own chips on Zynga’s potential gambling business. The San Francisco company behind “FarmVille” has struggled to make hit games and transition to mobile as competitors including “Candy Crush” maker King.com take share in the social gaming industry.

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That was evident in the stock market’s reaction. Shares of Zynga fell as much as 20% in early trading Friday.

However, some analysts say the decision to forgo gambling is a smart move for a company that needs to focus on getting its free-to-play gaming business back on track.

“This is the right strategy for Zynga as it attempts to focus its investments on its core Web and mobile games,” said J.P. Morgan Securities analyst Doug Anmuth, whose rates the shares “neutral.”

Macquarie analyst Ben Schachter wrote that he doesn’t think abandoning gambling is a bad idea, while noting that “the fact is many investors owned the stock almost solely for their belief in the real money gaming potential.”

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Now that the new Chief Executive Don Mattrick, the former Microsoft Corp. Xbox head, has sworn off the real-money gaming business, the company has to produce successful games, said Cowen & Co. analyst Doug Creutz in a research note.

“We think this is probably a wise move, focusing on business verticals they actually have experience in,” wrote Creutz, who rates the shares “market perform.” “With real-money gaming now largely off the table, and expense reductions not quite keeping up with bookings declines, the bull case is essentially reduced to hoping for some hit games.”

The company’s third-quarter revenue and earnings outlook fell short of analyst expectations. The San Francisco company said revenue for the third quarter will be $175 million to $200 million.

Zynga reported a second-quarter loss of $15.8 million, compared with a loss of $22.8 million during the same period last year. Revenue for the quarter that ended June 30 fell 31% year-over-year to $231 million.

“In short, we can do better,” said Mattrick in a conference call with analysts. “Getting a business back on track isn’t easy and it isn’t quick. We have a lot of hard work in front of us, but I believe we can succeed as a team and Zynga can do this.”

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