Zynga Shares Crumble as Analysts Sound Off on Negative Outlook

Zynga’s shares are hitting new lows this morning after it announced yesterday that its core social games business was facing significant challenges.

The San Francisco company reported preliminary third-quarter results that fell below expectations, and lowered its full-year outlook. In early morning trading, shares were down as much as 19 percent, and are now off about 17 percent, trading around $2.35 a share. That’s getting close to an 80 percent drop since the company went public at $10 a share in December.

At that time, Zynga was a Wall Street darling. It was dominating the Facebook charts, and easily raised $1 billion in an IPO. Now, its Ville-style games are struggling, as users shift their habits to mobile and away from games that emphasize major investments in time and expression, such as farm- and city-building.

Zynga still has a large cash balance, but has failed to use those reserves to make smart acquisitions. For instance, the hasty acquisition of OMGPOP earlier this year was intended to aid the company’s move to mobile, but now it is coming back to haunt it. Yesterday, the company estimated it will have to take an impairment charge between $85 million and $95 million in connection with the acquisition, representing about half of the purchase price.

Michael Pachter, an analyst with Wedbush Equity Research, said Zynga will unveil its cost-reduction plans on Oct. 24, when full earnings are released. On his wish list of expenses to slash was research and development costs, as Zynga begins to publish more third-party titles and transitions away from first-party game development.

Pachter lowered Zynga’s price target to $4 a share from $7, but justified maintaining his “outperform” rating, since the stock is trading close to cash. “We believe there is significant upside, so we concluded that only a price target revision is warranted,” he wrote in a note to investors.

Colin Sebastian of Baird Equity Research was not as kind, downgrading the stock to “neutral,” while lowering his price target to $3 from $6. “While the company’s over-dependence on Facebook and ongoing headwinds in user monetization are no secret, the magnitude of the Q4 miss heightens our platform concerns, and we are moving to the sidelines until there is more tangible evidence of a successful turnaround in the offing,” Baird said.

Facebook’s stock also is trading lower today, on fears that its revenues will drop along with its largest partner. This morning, Facebook’s shares were down about 2.5 percent, trading around $21.38 a share. Electronic Arts, which also has significant investments in social gaming, is also slightly off in morning trading.