Even after discounting the valuation because it's not the real money space leader, the shares are double the current $3.10 a share price. By leveraging organic growth through the current user base, Zynga could have an investment competitive advantage because the earnings wouldn't have to support the debt payments Amaya Gaming Group will pay.
Without its play money poker pole position, real money dominance becomes increasingly challenging. The world of online poker won't sit and wait forever for Zynga to capture market share. Once PokerStars can gain licenses within the U.S. market, it will be easier to capture play money users away from Zynga through incentives and critical mass.
The reason eBay (EBAY) can dominate online auctions is because it's the only site with the critical mass of buyers and sellers. It's the same theory for poker sites. Users are attracted to sites with the most players. If a site loses its critical mass, it's almost impossible to regain it. Using auction sites as an example again, Yahoo! (YHOO) was the number two auction site and the only real viable eBay alternative circa 2001.
Yahoo! decided to begin charging for auction listings, and in the process lost its critical mass of sellers in the process. A loss of sellers resulted in fewer buyers and without the buyers, sellers never came back, even after Yahoo reversed its decision. eBay has remained the largest uncontested online auction site since.
Zynga should move quickly to further monetize its free money poker base before users leave to play on other sites.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.