Markets: News  

The Ratings Game

Zynga ratings slashed by brokers on miss

SAN FRANCISCO (MarketWatch) -- Zynga Inc. was hit by a raft of downgrades Thursday after the social game maker reported disappointing results for the second quarter and slashed its forecast for the full year.

Zynga (ZNGA) shares plunged 39% to $3.09 by afternoon trades. The stock has now lost nearly 70% of its value from its IPO price in early December.

Facebook(FB) shares slipped more than 6% to $27.850. Zynga accounted for about 15% of the social network's total revenues in the March quarter. Facebook reports its second-quarter results after the closing bell on Thursday. Read earnings preview on Facebook.

The moves came after the company reported a loss for the second quarter, along with a surprising drop in bookings from the March period. Zynga cited recent changes made by Facebook that hurt the financial performance of its older, more lucrative games on that platform. It also said its "Draw Something" mobile title performed below expectations. Read full story on Zynga's results.

At least eight brokers cut their ratings on the stock following the results -- costing Zynga most of the bullish support it had on Wall Street.

"We were wrong about the current state of Zynga's business," wrote Scott Devitt of Morgan Stanley, who downgraded the stock to an equal-weight, or neutral, rating and cut his price target to $5 from $12.

"The severity of the guidance cut signifies the bear case is playing out, and Zynga faces significant headwinds from its reliance on Facebook and transition to mobile," Devitt added.

Heath Terry of Goldman Sachs also downgraded the stock to a neutral rating, writing that "despite the cash on the balance sheet, significant franchise value, and secular growth in online/mobile gaming, we believe shares of Zynga are unlikely to see significant upside until the company begins to return to prior levels of profitable growth."

A more bearish view came from Ken Sena of Evercore, who cut the stock to an underweight, or sell, rating with a $2 price target.

"Something smells in 'FarmVille,'" wrote Sena in a note, referring to one of Zynga's best-known Facebook games. He noted that while he had previously expressed concerns about the company's reliance on Facebook, "we are surprised by how quickly these events have manifested, particularly the impact of Facebook's changes to its GraphRank algorithm and mobile factors."

Evan Wilson of Pacific Crest left his sector perform, or neutral, rating on the shares, but noted that the company now faces the possibility of spending more to develop new hit titles, which will likely crimp profits.

"We (painfully) know that game stocks move higher on hits," Wilson wrote. "We do not see the game in Zynga's pipeline to turn this around. Until it comes along, it is hard to see the stock moving meaningfully higher, specially as we expect spending and acquisitions to drag on its cash balance in the interim."

Colin Sebastian of Robert W. Baird maintained an outperform rating on the stock, but slashed his price target from $13 to $6.

"While shares will now be in the 'penalty box,' over the long term Zynga should continue to benefit from the expanding markets for social and mobile games," Sebastian wrote, adding that the company's $2 per share in cash should provide some "downside cushion."