Wilson warned investors that buying the stock because it’s cheap may not be the best idea. “The cash balance and the operating cash flow might go negative and it might be a value trap,” he said.
Zynga went public in December 2011. Some investors question why the company went public in the first place.
If history can serve as a guide, Zynga may look like a riskier investment. Wilson explained that there have been several game companies in the past that have gone public with only one or two popular games. “As those games start to decline, they show that it is very tough to create hits,” he said.
In 2011, 11 percent of Facebook’s revenue came from Zynga. Facebook was down 7 percent in early morning trade and this may be attributed to Zynga’s poor earnings report.
Zynga claimed that some of its second-quarter losses came from changes in the way Facebook operates. It accused Facebook of favoring other game makers and putting Zynga at a disadvantage.
“Zynga said that Facebook is incentivizing people to go toward new games from old games,” Wilson said. “That transition is going from very high paying games to very low paying games.”
This transition is a sign that the payments revenue opportunity may be shrinking.
Zynga is the biggest chunk of Facebook’s payments revenue. Wilson said the Street had this business line growing over 50 percent in 2012. “Clearly that growth rate is too high,” Wilson said adding that it will likely be seen inFacebook’s earnings release.
Wilson cited concern in Europe, the transition from desktop to mobile, and the situation with the payments line as headwinds that will likely impact Facebook’s earnings report after the bell Thursday.
—By CNBC.com’s Madeline Laskoski
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Facebook is an investment banking client of Pacific Crest Securities. PCS makes a market in the shares of Facebook and Zynga.