I was just going over my successful and not so successful trades in 2013 and Zynga ended up being a loser for me -- mostly because of option bets on a move up that never materialized in the stock. In other words, I've been a believer for a while that this was a cheap stock that would move up, but the catalysts haven't really materialized yet.
So, be forewarned I have been wrong somewhat about Zynga to this point. But, call it my version of "Dogs of the Dow" theory, I think this loser is about to become a winner in 2014.
One thing I've called right so far in Zynga is that there's a definite floor for this stock. I'd say it's in the $2.75 to $3 per share area. It's tested that level several times now and bounced back. That's the floor value for the $1 billion + in cash, plus the pricey San Francisco real estate for its headquarters, plus some extra value for the operating business, even though that continues to be troubled.
The stock has gone up recently from the $3s to $4.50 and now slumped back to $4.
Where is the stock now and where do I think it's going in 2014?
Obviously, 2013 was a major milestone year for the company, with Mark Pincus, the founder and former CEO, stepping aside in favor of Don Mattrick, who was most recently running Xbox for Microsoft (MSFT) but at EA (EA) before that.
Getting Mattrick was a big deal. It's not every founder that would agree to step aside in the first place. Pincus not only did that but actively courted Don to make the switch and gave assurances that it would be Don's company to direct without Pincus' meddling. Mission accomplished and now you've got Mattrick in the saddle for six months.
Is Don the right guy? I believe so, absolutely. He's had success everywhere he's been. The Xbox certainly wasn't predestined to be a success and he worked it over multiple years and got it to its current top spot in its area of console gaming.
Don knows the industry, knows how to be successful and has the track record to show it. He's a guy who likes control and he wouldn't be at Zynga if he sensed he wasn't going to have it.
So, what's Don done so far? There hasn't been a big layoff yet (although I would guess that's likely coming at some point soon). The big stuff he's done is behind the scenes. He's swept out a lot of the old senior management team and brought in his own COO and staff. He's also likely killed a lot of games in production that he judged to have a limited chance of success.
All that is good stuff. It avoids having employees spread too thin across projects that aren't really likely to lead to success. But it's not going to start delivering some strong results in the meantime.
Zynga right now is stuck sitting around waiting for the next big game. And so are investors. When will that game come? Isn't it easy to pull off the next Candy Crush? It turns out it's not. So the bet on Zynga in 2014 is a bet really that, among all the new games that Mattrick has green-lit in the past six months (and there are likely many), 1 (or 2 if you're lucky) will hit it fairly big.
If that seems like long odds, don't long Zynga. However, gaming is getting more and more important with each passing year. When these games hit, they are staggeringly profitable. They don't have to be Candy Crush to be so lucrative either. If they hit the Candy Crush level, they are astonishingly profitable.
And in the world of mobile today, gaming matters even more. The hottest space in mobile these days isn't social networks like Facebook (FB), it's mobile messaging. That's referring to companies like WhatsApp, Kik, Line, WeChat and Kakao. All these companies are making a ton of money off hundreds of millions of their users. However, so far it's ad-related or sticker-related. They need more money to justify the lofty valuations that they're starting to get.
Gaming is likely going to be a big part of the answer and we're already seeing a move in this direction. WeChat has introduced 5 games to its 500 million users since August. Kik launched a Zynga game exclusively to its 100 million users a couple of months ago.
So, my point is that the world (including users and messaging companies) needs companies like Zynga. Their skillsets are unique. They have all the capability to start churning out not just one hit but a steady drumbeat of hits.
Look at Gung Ho from Japan and Supercell in Finland. Both have been able to successfully bring out back-to-back-to-back hit games.
Zynga has the capability to do this. So, while you have to take a leap of faith, if you're buying the stock, to believe it is going to be able to produce one or two hit games, look at your risk and reward. If you're wrong, the stock is likely going to go from $4 to $3 a share. If it can generate two hit games in 2014, there's a good chance the stock can go to between $10 and $12 a share. That's an attractive trade-off in my opinion.
At the time of publication, Jackson was long SFXE and ZNGA.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.