Where does Zynga go from here?

The social-gaming company keeps taking hits, and today its stock fell another 12 percent. Here's what it can do to convince investors that it's still kicking.

Donna Tam Staff Writer / News
Donna Tam covers Amazon and other fun stuff for CNET News. She is a San Francisco native who enjoys feasting, merrymaking, checking her Gmail and reading her Kindle.
Donna Tam
4 min read
Zynga CEO Mark Pincus (middle) when the company went public

Yesterday, Zynga announced a big write-off and told Wall Street its growth was slowing. Today, Wall Street returned the favor by crushing Zynga shares, forcing them down 12 percent to $2.48.

Analysts say Zynga could still recover. It remains a leader in the casual-gaming industry, with more than 300 million monthly users, and as of July 30, it held a decent financial cushion in the form of $436 million in cash and equivalents on hand -- a good chunk of the $1 billion it raised in its IPO late last year.

It's starting to look like Zynga's going to need it.

Zynga claims its latest problems mostly stem from delays in some new games and what it termed "reduced expectations" for games such as The Ville. Read between the lines of the memo to employees that CEO and co-founder Mark Pincus penned yesterday, though, and it seems clear that the same rapid shift to mobile that hammered Facebook has also done a number on Zynga.

And that's just one of several big challenges for the company. Zynga faces multiple lawsuits accusing it or its executives of copyright infringement and insider trading.

It has spent money like crazy, too. Yesterday, Zynga also revealed its plans to write off nearly half of the $210 million it paid for game maker OMGPOP, which was riding high thanks to its Pictionary-like game Draw Something. Zynga, unfortunately, bought OMGPOP just as Draw Something crested; its user numbers have cratered.

Since Zynga went public, last December, at $10 a share, the company's stock has fallen more than 75 percent.

In his statement yesterday, Pincus said "cost reductions" are on their way. Analysts expect those reductions to be detailed in Zynga's October 24 earnings call.

Additionally, more than a dozen executives have bolted this year, including COO and board member John Schappert, and Zynga faces increasing competition in the growing market.

"Zynga has lost at least 13 key employees since March and it could see additional developers poached by other Silicon Valley firms," Brian Pitz, managing director at Jefferies & Company, a global securities and investment banking group, wrote in a report today. "The departures underscore our skepticism about Zynga and its ability to address the challenges it faces as it pivots toward mobile and its in-house gaming platform. Yesterday, CEO Mark Pincus asked employees to not lose sight of the bigger picture, but this may not be enough."

The executive departures continued today. Paul and David Bettner, creators of the popular game Words With Friends -- essentially Zynga's only successful mobile strategy -- said they are leaving as well.

And more could leave if the situation stays the same, according to former Zynga employee Nabeel Hyatt. Hyatt worked at Zynga for almost two years, after Zynga bought his startup Conduit Labs in 2010.

"There are still a lot of amazing people at Zynga, but I'm sure most are itchy," he wrote in his blog today. "They were hired into a fast growing, high risk, startup. They've watched a company do what a lot of companies do over time, get bloated, fill with bureaucracy, and try to solve uncertainty with austerity. That's no recipe for success.... The company can go back to its roots, get people motivated about the risks instead of wishing them away. Mark (Pincus) can take some bold, even extreme, moves to show the folks he has left that he cares about them..."

So what will save Zynga at this point? A better mobile strategy for sure. Maybe a miraculous increase in advertising revenue or the legalization of online poker, which would let Zynga easily monetize one of its most popular games, Zynga Poker, Pitz writes. Or, just a show of good businesses sense?

The company needs to demonstrate that it can make money on its $1.2 billion revenue and "reassure investors that they can be good stewards of capital," Wedbush Securities analyst Michael Pachter told CNET via e-mail. This means no more acquisitions followed by a write-off, he said.

Zynga may also need to lay off some of its 2,800 employees, or at a minimum, establish a hiring freeze, Pachter said.

Pitz said the company should continue to invest in mobile while moving away from developing games. Zynga has already started its quest to become a multiplatform game network by partnering with third-party developers.

What the company won't be doing anytime soon is putting up the For Sale sign. Pincus controls 50.15 percent of the stock's voting power, and has said he won't sell.

"I think he is interested in proving that this is a real business, and that he can lead it," Pachter wrote. "I don't expect him to consider a sale."