Why Zynga may not be a buy, even at $3

by Michael Tarsala

Zynga (ZNGA) : Is it really a buy at $3?

Shares of the online gaming company are down 40% in early trading to around $3 after it reported a very poor quarter relative to expectations. The stock had an IPO price of $10.

Its hit game Farmville game is now overfarmed. The company has not come up with new games to move the needle. And its current slate of games are not being promoted as heavily on Facebook; instead Facebook (FB) has given better placement to new games made by other companies.

The company is starting to look like a fad than a real business, said Paul LaMonica, at CNNMoney.

Yet at a certain price there likely is value: The question becomes, at what price?

Zynga has about $1.6 billion in cash and marketable securities a share following its report, and is only trading at $3. That’s around $2.10 a share in cash. And it would value the operating business at a little more than $650 million.

Henry Blodget is out with a defense of the company this morning, suggesting partly that Zynga is perhaps a takeout target at such a low valuation.

One worrying factor, though is that Zynga could also become an acquirer, instead of a company being acquired. The company needs new hit games.

It also has a history of many acquisitions.

A spending spree at this stage may not be greeted warmly by the Street.

That may be the one factor that gives investors pause on Blodget’s otherwise valid valuation argument.

Photo by: hiro_y