Zynga is easily the top social games maker, but its dominance and massive valuation (overvaluation?) should not be taken for granted. DAUs (daily active users) have been showing major declines for the company even with Zynga launching five new games in the last four months.
Zynga's DAUs declined by 700K to 46.9MM (-1.5% m/m) over the past five weeks. Even the most recent game, Zynga's sequel to Mafia Wars, hasn't quite demonstrated the high numbers many were expecting. Cowen and Company analyst Doug Creutz has pointed out that the recent poor numbers could affect the much talked about IPO from Zynga.
"We view the user trends at Zynga as extremely troubling given the apparent lack of organic growth."
"Three of the five recent launches ('Empires & Allies', 'Pioneer Trail', and 'Adventure World') have suffered 40%+ DAU drops off their post-launch peaks, while 'Mafia Wars 2', launched two weeks ago, is already showing signs of having peaked. We think the lack of user growth at Zynga - which is really a two-year old problem - could cause issues ahead of a potential IPO in November, particularly given an expected rich valuation," he said.
The closest competitor to Zynga, Electronic Arts, has seen its DAUs drop as well, falling 3.5MM to 14.6MM (-19.5% m/m) "as the viral growth of The Sims Social appears to have ended," noted Creutz. But for now, Zynga needs to worry about Zynga, not EA. The company must figure out a way to drive user growth.
New titles don't appear to be doing the trick, as they are "largely cannibalizing users from old titles, and failing to attract new users to Zynga’s portfolio," said Creutz.
He further expained Zynga's problems:
"At least as disturbing has been the degree to which new launches have begun rolling over almost immediately after the initial launch. Three of the five games (Empires & Allies, Pioneer Trail, and Adventure World) are already down more than 40% from peak DAU levels. Mafia Wars 2 hit a DAU peak 8 days after launch and has gone sideways for the last week; while it is very early in the game’s lifecycle, we view this as a bad sign, particularly given that Empires & Allies, Pioneer Trail, and Adventure World hit peak levels between 5 and 18 days after the initial launch. Only Words With Friends has enjoyed sustained DAU growth (and we note that this was a Facebook port of a popular mobile game that Zynga acquired, i.e. not developed internally at Zynga). In sum, we view the user trends at Zynga as extremely troubling given the apparent lack of organic growth, particularly in front of an IPO that continues to be talked about at rich valuations in the $10B range."
