Zynga's Valuation Rises as Nevada Legalizes Online Gaming

by Anthony Shields, Minyanville staff writer

During the past few months, Zynga ZNGA has been experiencing a remarkable turnaround. Until recently, the social games maker had been treated as a terminal company. While there are still worries about its long-term prospects, Zynga has been enjoying a string of good luck lately. Its latest victory comes in the form of Nevada’s recent decision to legalize online gambling, which may potentially encourage other states to do the same. The company’s stock has risen more than 10% today, due to investor speculation that Zynga's online ventures could benefit from Nevada's decision.
After President George W. Bush signed the Unlawful Internet Gambling Enforcement Act in 2006, online gambling was banned across the country and a task force was created to patrol the Internet for violators. However, as many as 12 states have planned to discuss bills that would make online gambling legal. According to analysts at Goldman Sachs, the legalization of online gambling in the US could create a market worth $12 billion.. It might be some time before other states follow Nevada’s example, but Zynga’s bottom line will surely benefit if they do.
Zynga's partnership with Bwin.Party Digital Entertainment BPTY will soon allow it to rake in profits from the online gambling industry in Europe, a market expected to hit $42 billion before 2015. Analysts at Morgan Stanley estimate that more than 170 million people play simulated casino games on social networks; this is a market that Zynga could easily dominate if it brings Bwin.Party's gambling business stateside and creates options for real and play money. Should online gambling become widely adopted in the US, Zynga’s presence on sites like Facebook FB and mobile platforms like Apple’s AAPL iPad would give it tremendous reach to pull in users.

The industry plays to Zynga’s strengths, but there are still reasons to be doubtful of the game maker's success. Zynga’s up-and-down history has not left it with a reputation for being reliable, and it lost many of its key staff members last year to other companies and spin-off start-ups. Due to slumping bookings, the company has also gone through a string of layoffs. Most recently it was forced to shutter its Baltimore office and consolidate its New York and Texas operations. No one’s quite sure yet how these staff and operations changes will affect the company’s quality as a developer in the future.
Still, it might not matter; as long as Zynga does a good job at allowing users to log in, place bets, and collect their earnings with ease, it could equal or even surpass the $5 billion per year that online poker site Pokerstars has made in the past. The social games maker seems uniquely positioned to deliver in this industry -- so the more states that consider legalizing online gambling, the more likely it is that Zynga will stay in the green.

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