Will Zynga Be Saved By Real-Money Games?

Struggling social game developer Zynga (NASDAQ:ZNGA) enjoyed a 7 percent boost to its stock price on Thursday after announcing that it has filed paperwork seeking permission to conduct real-money online gaming in Nevada.

Is This a Strong Gambit or a Red Herring?

Zynga has been after real-money online gaming for a while. As early as January of 2012 the company announced its intention to build out Zynga Poker into the real-money market, and has since partnered with bwin.party in the United Kingdom. Zynga Poker was the company’s first social game and is currently the most popular free-to-play poker game in the world.

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But the chances of Zynga successfully becoming a poker champion look slim. Federal law allows online gambling in the U.S. but the legal architecture for permitting it is up to each state to work out, and progress has been slow. So far only Nevada and Washington, D.C., have enacted laws supporting it, and it can take up to 20 months to compete the approval and licensing process. While the company’s announcement may have excited investors hoping Zynga can capitalize on the lucrative poker market, any conceivable benefit is still far off…

The massive success that companies like PokerStars had pre-2011, when the federal government all but exiled online real-money gambling, proves that there could be a place for Zynga Poker in the real-money market. But as some observers point out, the success of PokerStars is also a barrier to entry. PokerStars has a strong reputation among the poker-playing elites in America and if faced with a choice, it’s hard to see serious players picking Zynga.

The struggling social game developer will also face competition from established players in the poker industry like MGM Resorts International (NYSE:MGM) and Caesars Entertainment (NASDAQ:CZR). Both companies posted substantial gains on Thursday alongside Zynga’s short rally, but Caeser’s actually has a good reason to celebrate. The company’s stock surged over 14 percent because on Wednesday the Nevada Gaming Control board tentatively approved the company’s poker website.

CHEAT SHEET Analysis: Trends Support the Industry, but Not the Company

One of the core components of our CHEAT SHEET investing framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raises all boats.” Online real-money poker sites could easily float in the U.S., as demonstrated by the success of PokerStars, which bagged $1.4 billion in revenue in 2010.

The U.S. commands 25 percent of a global gambling market estimated to be worth $417 billion. Only 3.3 percent of those profits currently come from online gambling, suggesting both room to grow and a tooth-and-nail fight for market share. At the end of the day, investors will have to choose who they think will win the fight.

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