Zynga Inc shares are set to open 19 per cent lower on Friday after the maker of "FarmVille" said it would abandon plans for real-money gaming in the United States, prompting at least three brokerages to cut their price targets on the stock.
Many investors own the stock only because they believe in the potential of real-money gambling, said Macquarie (USA) Equities Research analysts Ben Schachter, John Merrick and Tom White. Macquarie cut its target for the stock to US$2.75 (S$3.48) from US$3.00.
Zynga's gambling efforts kicked off this year in Britain, but gambling with real money is illegal in many US states. Seeking a license would tie Zynga in regulatory tangles.
The company has up to a year of volatility ahead, Zynga Chief Executive Don Mattrick warned on Thursday in his first public comments since replacing founder Mark Pincus as chief executive on July 1.
Zynga lost 40 per cent of its monthly active users in the second quarter. Revenue fell about 20 per cent.
"In our view, by exiting RMG (real-money gaming) the company has eliminated much of the potential upside for the stock," Needham & Co analysts wrote in a note and downgraded the stock to "hold" from "buy."
Piper Jaffray analyst Michael Olson said turning away from RMG licenses in the United States may be the right decision, but it will turn away several investors.
Zynga shares closed at US$3.50 on Thursday on the Nasdaq.