Before Zynga can start worrying about Google taking market share from Facebook, Zynga has capacious and more imminent concerns. Both Yahoo and Electronic Arts know games and have the infrastructure to produce content. Expect to read a lot more about Electronic Arts in 2013. Unless Electronic Arts' entry into the space expands the user base, Electronic Arts will create headwinds for Zynga. How Yahoo and Zynga interact and compete promises a very interesting study of marketing. Yahoo's new chief may have her hands full for a while. Yahoo has the ability to support Zynga, but it doesn't appear to be in the long-term best interest for Yahoo. Can Zynga enter into online gambling like Internet poker? Some believe it's only a matter of time while others question online poker's prospects. The United States was sued and lost a World Trade Organization ruling on the subject of online gambling. The U.S. basically ignored the ruling and carried on as if it didn't happen. I wouldn't bet too much on Zynga's future betting prospects. Even if online gambling/poker becomes a reality, the barriers of entry are low and big casinos can offer perks to users that Zynga can't without buying Las Vegas property. Zynga's share drop isn't actually all that bad. I know most shareholders may not agree that a 40% haircut isn't bad, but on a relative basis it could be much worse. Zynga cut its 2012 forecast down to earnings of 4 cents to 9 cents. On the very top end of the 2012 earnings estimate Zynga is priced at a price-to-earnings ratio of 30. I consider a multiple of 20 or more as expensive and priced for growth. Considering the earnings result, along with $332 million in revenue, versus the expected $344 million, Zynga has its work cut out. Zynga has dug up part of what we can expect from Facebook. Facebook reports Thursday after the closing bell and is down over 6% for the day. Could Facebook surprise the market with a smashing beat? Sure, but the odds don't favor it. The likely scenario is Facebook comes in very close to the earnings numbers. Wall Street won't focus so much on Facebook's earnings this quarter as it will on user growth, and other user metrics. Wall Street wants to see an endless stream of new users signing up and spending every waking moment on Facebook.
Based on my experience with gap-downs following earnings misses similar to Zynga, investors will see short-term lows Friday or Monday. Thursday will have a lot of shares traded near $3,and you can expect a lower close than the open. I calculate the odds of a closing price below $3 at over 60%. Bargain hunters and short-sellers covering positions could push the price up quickly in relation to the gap-down price this week. Looking at the chart, I expect short-term resistance near $3.50 and again at $4. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of bargain hunters to start positions under $2.50 as an entry. Zynga doesn't have debt and cash on hand gives management an abundance of opportunity. If you were looking for Thursday's price drop to signal a buying opportunity, you may find the end of the day Friday or Monday better. There is no hurry jumping on board with Zynga. Stocks dumping as a result of misses like this one take one or two good earnings quarters to recover. Zynga has such a short history with earnings it's hard to say if the issues are seasonal or not. Take your time and do your homework before allocating capital here. Look for the second break above $4 as the one that "sticks." What's the best play with Zynga? There should be a very attractive trade coming up Friday and/or Monday. Near the end of the day if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time, the stock should bottom. It's not one to get greedy with. Hold on for a few days and as the implied volatility falls (hopefully with a nice dead-cat bounce), exit out with a quick hit and run for profits. Otherwise, for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry. At the time of publication the author did not have a position in any stock mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.