Most investors are sick and tired of social media stocks. They are of course hopeful and perhaps unfairly optimistic about the future of social media and trying to analyze its real value. Zynga (ZNGA) is one stock that is currently getting more looks as it is trading near the $5 mark, well below its IPO price last year. If it turns out to be a home run winner, now is the time to get in and buy. But is Zynga a stock you really want to risk holding?

Zynga, founded in 2007, a social media game developer went public last December at $10 a share. Since then the company has been a roller coaster ride for investors, but mostly just a downward spiral, falling nearly 46% since the IPO. The company surprised many by going public before Facebook and sweetening the pallet of many Facebook investors. They make the popular games like Farmville and an online Zynga Poker. Their greatest asset is their ability at developing games for mobile devices.

There are a variety of reasons Zynga has been falling. For one, Zynga is not profitable. For a $4 billion dollar market cap the company has an income of negative, that’s minus $490 million. Losing that amount of money is enough to make everyone upset.

My main problem with Zynga is that it does not do enough to differentiate itself from other mobile gaming company’s many of which are still start ups and private companies. These competitors have many similar games and can often be just as affordable if not more than Zynga. This company needs to begin developing games that have a more difficult barrier to entry. If everyone is producing similar models Zynga will have nothing to offer customers and may become irrelevant.

In order to become profitable Zynga it has been recommend, must cut its reliance on Facebook for earnings. Less and less people are paying for online games and they are notoriously more difficult to monetize. It may be one step closer by their introduction of “Zynga with Friends” and zFriends a social network for their online gamers in which they can directly compete with each other and chat live as they play. The only question here is, will they hurt their relationship with Facebook and alienate themselves from their largest market currently?

Facebook and Zynga have a  unique relationship. Zynga gets a majority of its earnings from Facebook users and Facebook comprises the majority of its earnings besides advertising from gamer Zynga. The relationship becomes strained because Zynga is showing evidence of interest in moving beyond the social network. Not only with its own social network but because of its dominance in mobile which can cater to potential Facebook competitors like Apple, Google and Microsoft.

There has been some talk about Zynga getting involved in online gambling games such as poker and blackjack. Although Zynga already runs a poker game it is only a game and not real gambling. This is because internet gambling in the United States has recently become illegal. If that law is lifted (hard to say when or if) they are in a great position to capitalize on this market.

Mobile gaming is still in its infancy and hardly competes with the wildly successful consul gaming. Nevertheless, Zynga needs to do a better job of monetizing its community while at the same time becoming more imaginative with games, that will reward them with loyal gamers. It has a huge customer base of tens of millions. But we cannot put too much with on potentials just like user bases like Facebook which is becoming more and more troublesome for investors who aspire for more monetization.

Tagged Apple, Facebook, Google, mobile, online gaming, Social Media, ZNGA