Is Zynga Fighting an Uphill Battle?

Following the departure of VP Roy Sehgal and general manager Steve Schreck, shares of social gaming company Zynga (NASDAQ:ZNGA) added to Friday’s losses and traded over 9 percent lower on Monday afternoon. Aside from hemorrhaging talent, the company seems to have lost star-treatment status with Facebook (NASDAQ:FB).

Is Zynga’s Time in the Spotlight Coming to an End?

Zynga’s new relationship status with Facebook catalyzed a sell-off on Friday when it was announced, sapping already fickle investor confidence from the struggling game developer. Monday’s sell-off is in many ways an extension of this evaporation in investor interest and was spurred on by news that not only will the company be shutting down Mafia Wars 2, but Facebook may be entertaining a new monetization model for smaller game developers.

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At a dinner hosted by Facebook CEO Mark Zuckerberg at the company’s Silicon Valley headquarters, game developers from companies such as Electronic Arts (NASDAQ:EA) tossed around ideas about how to breathe some life into the social gaming space. According to AllThingsD, one idea tossed around was a scaling fee model for smaller developers.

Currently, Facebook charges 30 percent for virtual goods sold inside its games. The model tossed around would fix the charge on virtual goods to the volume of goods sold, so smaller game developers would pay less. This would mean lower costs for new competitors hungry for Zynga’s dwindling user base…

While Facebook has no plans to immediately change its revenue model, there is logic in providing incentives for smaller developers. The social gaming space as a whole could use a jolt of electricity and creative new games could go a long way in enticing users back.

CHEAT SHEET Analysis: Do the Trends Still Support Zynga?

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.”

When Zynga launched its IPO, the hype surrounding social gaming was so thick investors could float in it. The company’s stock price took off in February and peaked in early March before beginning its long, 74-percent slide. User interest in Zynga’s games has evaporated and, with it, the value of the company.

Successful gaming companies like Activision Blizzard (NASDAQ:ATVI) recognize that success comes in two forms: blockbusters, and cash cows. Zynga hasn’t been able to produce either one since the good-old days, and with the exodus of talent seen in the last few months, it’s seems increasingly unlikely to pull a smashing success out of its hat.

The renegotiated deal with Facebook may give the company some more freedom to pursue mobile-based games, but success feels dubious. The power behind Zynga’s gaming philosophy seems to fizzle without Facebook, and the trends indicate that developers are seeking more lucrative opportunities developing for Apple’s (NASDAQ:AAPL) iOS and Google’s (NASDAQ:GOOG) Android. As much as Facebook wants to be the platform of choice for game developers, Apple and Google may claim that title.

Data from iSuppli indicates that the downward decline in Facebook gaming began in the fourth quarter of 2011, and could continue to decline further before seeing a bottom.

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