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Why This Decision From Zynga is Doomed

I hate to say “I told you so,” but… I told you so!

Think back to February 2012 when gaming company, Zynga (ZNGA), was rumored to be considering entering the online gambling space.

At the time, I warned that it was a terrible idea.

On Thursday, Zynga’s management officially conceded the same.

And it did so after spending less than a year pursuing the opportunity. Talk about a sudden change of heart.

Per the company’s quarterly earnings report: “Zynga is making a focused choice not to pursue a license for real money gaming in the United States.”

Shares got crushed on the news, dropping by almost 20% at one point.

Hardly surprising, given that Wall Street analysts said the online gambling market was the company’s best chance at survival. (A market that’s expected to top $7.4 billion in the United States by 2017, according to H2 Gambling Capital.)

Now that Zynga is folding its hand, investors rightfully believe the company is doomed. In the last year, Zynga’s number of daily active users slumped by 45%, active monthly users sank by 39% and paying players tumbled by 53%.

So with Zynga ditching its online gambling venture, what’s it going to focus on instead?

As it turns out, another online venture that could prove equally tough – because it’s taking on one of the most established players in the area. Oh, boy…

Zynga Isn’t Just Fashionably Late… It’s Too Late

I’ll give Zynga’s executives some credit. At least they’ve admitted their mistake with online gambling and cut their losses before the situation got worse.

Moreover, they’ve successfully identified the two most compelling growth opportunities in the market.

Mobile and free-to-play social games.

The only problem? They’re too late to the party.

San Francisco’s Glu Mobile (GLUU) is already a recognized leader in both categories.

Case in point: Whereas Zynga only generates about 30% of its sales from mobile devices, a whopping 90% of Glu’s sales come from smartphones.

What’s more, the overwhelming majority of Glu’s sales come from free-to-play games via in-game transactions, advertising and other offers.

Still, many investors would look at Glu’s diminutive $189-million market cap, compared to Zynga’s $2.4 billion, and ignore the smaller player.

But don’t let Glu’s size fool you. It’s hardly a newcomer…

Why Glu Rules Mobile Gaming

Glu has actually developed games for more than a decade. And it regularly lands big deals with technology heavyweights, including chip giant, NVIDIA Corp. (NVDA).

More recently, it announced a deal with MGM Interactive, which gives Glu the opportunity to develop mobile games based on already-popular franchises like James Bond and RoboCop. The deal also brings up to $10 million in financing.

On the stock side, the most compelling metric is that there’s sizeable insider ownership of the company – 25.75% of outstanding shares, to be exact.

Gross margins also top out at a solid 85%, with no debt. There’s also the potential for a takeover.

And a precedent, too…

Remember, Electronic Arts (EA) plunked down $750 million to purchase PopCap Games about two years ago. So it clearly sees the potential in the social and mobile gaming space.

And with $1.7 billion in cash, EA could easily dip into the bank again and buy Glu to bolster its portfolio.

Bottom line: Keep betting against Zynga and start betting on Glu.

Ahead of the tape,

Louis Basenese