Penny Stock Game Companies – Is Now The Time To Buy?
Time To Buy Stock In These Game Companies: Zynga $ZNGA, TransGaming $TNG, or Kongzhong $KZ?
Today’s article is inspired by a question from one of our readers!
Daniel emailed me the other day asking about a stock he was looking at. It was a gaming company based in Canada called TransGaming $TNG.
I couldn’t respond to him right away because I needed to do a bit of research. You see, I wasn’t familiar with TransGaming… and I needed to dig a bit into their financials.
And of course once I started my research, I stumbled across a bunch of other penny stock game companies that I had to research as well.
I have some very opinionated thoughts on the gaming industry… and to be honest, I think a bunch of the companies in the industry are crap!
Why I Don’t Like The Penny Stock Game Industry
My very first interaction with the video game industry happened years and years ago… back when I was a banker in San Francisco. I met with a number of companies and studied the industry pretty closely.
It was right at the time the video game makers were transitioning from consoles to PCs. The critical driver at the time was the console renewal cycle. The Xbox was just released. Sony, Sega, and Nintendo were the other competitors.
No one saw the games for phones on the horizon.
What I learned from those days… the video game industry was all about hits.
The blockbuster game was what every company needed. Games were very expensive to create and the time and money spent reached into the millions and millions.
If a video game company didn’t see a big winner right out of the gate, the entire company’s future could be in jeopardy.
Unfortunately, it’s still that way today… and that’s why I don’t like the industry much… most of them are bad stocks.
Penny Stock Game Industry – Blockbusters Needed!
Here’s the real problem.
For every one video game that gets the attention of the world, there are thousands who flop. Don’t believe me… just go to the Apple store and look at how many games there are. You’ll find thousands and thousands you’ve never heard of.
Big winners are hard to come by… and they aren’t as easy to create as many people believe.
You see, management teams are stuck between a rock and a hardplace. If they roll out a game and it doesn’t hit the big time right away, they’ve got a tough choice. Do they spend more money trying to market the game and hope the marketing drives enough users to turn a profit.
Or do they just cut the cord and start over with a new game?
In one situation, they risk more money on a mediocre product. In the other, they flush millions of dollars down the drain.
Now, here’s the rub…
If the company does get a blockbuster, the profits come fast… but the pressure to create a new blockbuster builds. The costs of implementing improving and upgrading a game continues on…
But some day the party will end.
The history of video game software is littered with blockbusters that are no longer relevant.
Some investors compare the blockbuster nature of video games to that of biotechnology developers. It’s a good comparison, but totally wrong. While they both put out huge amounts of money to create a winning product… and a blockbuster product can make or break a company… the truth is biotech companies are different.
Biotech companies have a built in customer base and are granted long term patent protection. No such luck in video games. The hot game this year will be forgotten by next year.
Regardless, let’s dig a bit deeper into three penny stock companies: Zynga $ZNGA, TransGaming $TNG, and Kongzhong $KZ.
Penny Stock Game Industry – TransGaming $TNG
Let’s start with TransGaming $TNG. This is a company that our reader Daniel asked about. TransGaming is based in Canada, so I jumped over to the Sedar Site to review the business.
What I found wasn’t too promising.
Despite a recent agreement to sell some technology to NVIDIA for $3.75 million, the company still hasn’t generated a meaningful blockbuster game. Their GameTree product is focused on settop boxes in the home…
Personally, I think the future is games on the smartphone. I could be wrong.
However, a few things bothered me about TransGaming. First is the company website – it’s woefully empty when it comes to important news and information on the company.
Second, I don’t like it when the company gives away stock – it’s a piece of the business and it dilutes current shareholders…. see their press release on June 5, 2014. They repriced warrants and issued 750,000 bonus shares.
Normally that would be enough for a pass, but I wanted to dig into the financials…
This is the third thing I didn’t like about the company… the financials.
The company has some sales, but expenses FAR outweigh revenue… as a result, they lose several million a quarter… and the only thing saving them is the foreign exchange gains they are seeing. Back out the foreign exchange numbers and the results are even worse!
Sorry Daniel, I wouldn’t touch this company with a 10 foot pole.
But is industry leader Zynga any better?
Penny Stock Game Industry – Zynga $ZNGA
Look, I’m not going to dive into Zynga too much… a quick review of their most recent quarter shows it’s a total waste of time.
Just look at these numbers… Revenue is UP 30% to $200 MILLION… Yes, $200 million…
YET… the company managed to produce a net loss of $27 million.
This is not new… just look at the chart.
As you can see, this company imploded shortly after going public. Barring a massive turnaround, I don’t see it getting any better.
The stock is ugly… The company is ugly… If you own this stock, dump it.
So, what about Chinese gaming companies?
Penny Stock Game Industry – Kongzhong $KZ
There are a number of companies selling games in China… but one that jumped out at me is Kongzhong.
Interestingly enough, the company is still impacted by the blockbuster plague… However, they are making money… and good money too.
Shocker right?
Last quarter the company announced $50 million in revenue and a profit of $19 million… that’s a staggering 38% margin!
Is this company a sure thing slam dunk? Far from it. They have 10 new products to release in the next few quarters and they need to keep costs lean and profits high.
A huge positive is the strength of the stock despite the turmoil in the Chinese markets. This company seems to have sidestepped the worst of the destruction.
Any way you slice it, Kongzhong $KZ is an interesting way to get exposure to both penny stock game companies and China at the same time.
So there you have it… the truth about penny stock game companies and if they are worthy of investments. If you have a question about a stock or investment idea, shoot us an email or leave us a comment on the website.
Better yet, if you own any of these stocks… or are planning to buy… shoot me an email and let me know why!
Good investing…
Brian Kent
Note: If you’re interested in learning more about Brian Kent’s Penny Stock All-Stars premium service… and learning about the stocks we’re trading for profit… you can get the inside scoop on penny stocks here.
Category: Penny Stocks to Buy
