Zynga is vastly undervalued

Zynga’s stock has been in a freefall since its initial public offering, with tech pundits and press watching with gleeful schadenfreude as it continues to drop. Zynga is now worth essentially nothing: Its market capitalization of $1.82 billion is roughly equal to the value of its cash and real estate holdings, even with yesterday’s announcements of real money gambling and a $200 million stock buyback.

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How can a company that brings in $1.2 billion a year, and recently cut costs in order to achieve profitability, be worth nothing?

It doesn’t make sense. Here’s why Zynga is undervalued — provided it does the right thing next.

Zynga is actually sitting on three widely-known and popular potential gaming franchises: Farmville, Poker, and With Friends. Each of these titles is well known, has broad distribution, and an audience at least willing to check out a new iteration on the franchise. For instance, Farmville 2 just garnered 50 million users shortly after its launch. And each of Zynga’s potential franchises targets a different audience: Farmville for middle-aged women, Poker for middle-aged men, and With Friends for the lucrative under-30 market.

What Zynga needs to do is expand its franchise strategy.

The gaming industry, much like Hollywood, is all about franchises. It is easy to churn out another Spiderman movie or Call of Duty title, because there is already an audience for the content, which is a huge part of the hurdle in terms of success. Once you have a guaranteed audience, you can focus on the content.

Rovio, the makers of the Angry Birds franchise, is worth a reported $9 billion. Angry Birds is a great, fun, casual game that has successfully implemented distribution onto emerging smartphone mobile platforms, but in many ways Angry Birds is simply the Tetris of this generation of computing. In effect, Angry Birds is a single-player, traditional game that doesn’t leverage the social graph, multiuser gaming, and advanced graphics. It barely even takes advantage of touch screens.

Still, it’s hugely profitable because Rovio has truly turned Angry Birds into a game franchise. Rovio has leveraged every possible gaming channel from iPhone to Android to even the Google Chrome App Store, added Star Wars editions, and signed cross-industry deals for everything from stuffed toys and lunch boxes to theme parks. Previous to Angry Birds, Rovio had 51 failed titles. It is now promoting Bad Piggies, a new title that is actually a spinoff of its Angry Birds franchise.

Franchises are not necessarily a guaranteed result, as titles can run over budget and fail at the box office. However, from a business perspective, it is a lot better to get a 50 percent headstart than starting fresh and rolling the dice with new content.

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It is easy to see Zynga as a pure-play social gaming company that is struggling to shift into mobile, while social gaming becomes increasingly difficult to monetize. Yes, social channels have dried up after Facebook’s shift to Timeline stymied potentially viral newsfeed user acquisition (aka spam). And indeed the Zynga game playbook has gotten tired now that Facebook is no longer a new platform and expectations of game mechanics have matured.

But in reality, Zynga sits on three potential franchises, each of which could be huge.

Right now, Zynga’s most popular titles are stuck in their existing channels. Farmville and Poker are only available for Facebook users. With Friends games are only available on mobile. Each of these titles could easily go cross-channel, to Wii, Xbox and Playstation. Why not play Zynga Poker on Xbox Live?

Building deep, franchise-driven titles for multiple platforms takes time and investment. However, it is a proven monetization model.

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In addition, Zynga’s announcement yesterday of real-money gambling is also potentially lucrative, especially in context of its ability to deliver the gambling audience of its Zynga Poker gaming franchise.

The technology industry, particularly its intersection with Wall Street, can be very herdlike, and it is hard to shift the herd perspective on companies like Zynga that are in flux. Still, a herd mentality can be an opportunity for clever investors to make a bet against the crowd.

In the midst of writing this article, I was having dinner with a hedge fund manager in London, who usually invests in things like mines. He had just bought Zynga for his personal portfolio, despite the fact that Piper Jaffray, Credit Suisse, and BMO Capital all downgraded the stock. The pure hedge fund perspective is to bet against the market, especially when the market is not acting on fundamentals.

And while this hedge fund guy usually invests in physical mines, even he has noticed that Zynga is sitting on a potential gold mine — one that is definitely worth a whole lot more than nothing.

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Peter Yared is the CTO of CBS Interactive and has founded four e-commerce and marketing infrastructure companies that were acquired by Sun, VMware, Webtrends and TigerLogic. You can follow him at @peteryared. 

This story originally appeared on CNet.