What is going to happen to Zynga?

If my email inbox is any indication, there’s a lot of speculation about Zynga (ZNGA) right now. Is it a good buy? Is it even going to exist in the year?

I can understand why people are obsessed over this. After all Zynga is one of the benchmark companies of Web 2.0. If the first wave of the web brought us Yahoo (YHOO), Ebay (EBAY) and Amazon (AMZN), this wave was to bring us Facebook (FB), Zynga, Twitter and LinkedIn (LNKD).

Let’s just talk about what we know Zynga is, and isn’t. First, the facts:

Zynga stock went drastically down, again, last night. Zynga lowered its guidance for the full year for the second time, and has taken a huge hit to its stock, down nearly 20% in after hours trading.

Zynga is currently valued at roughly $2.7 billion. To put this into perspective, that is likely around the value of their B round. They are trading at close to $2 a share. After their Q2 results they reported $1.80 a share in cash + $0.25 in other assets (primarily their headquarters at 444 De Haro). Accounting for the $100m loss in Q3 that they are forecasting, that leaves the business valued at roughly $271m. That’s for a business that is guiding to Ebitda of $147-$162m on the year.

Next, let’s cover the worst case scenarios.

Is this a house of cards?

Is there something about Zynga’s business that is inherently unsustainable? No. Gaming is by far the category for revenue in both social and mobile markets. Nothing else comes close, not photos or local or music/movies or anything else. If you believe in social/mobile software and like revenue then games is the trump card right now.

Zynga is still the dominant force on Facebook, although that platform is in decline currently. On mobile it has managed to establish itself as a top player through building, buying, and now publishing, although it’s quite obvious that the revenue in mobile is still way too early to make up for the losses on the Facebook side.

Is it about to be subject to a hostile takeover? Is Facebook going to buy them?

Mark Pincus’ voting rights pretty much assure that nothing is happening without him approving it. And Facebook buying Zynga makes about as much sense as Apple (AAPL) purchasing a gaming company. As much as it might make sense to a  Wall Street broker, Facebook does not see itself as a content creator. Anyone seeing “synergy” doesn’t really understand what drives the senior execs at Facebook.

Now that we’ve gotten the craziness out of the way, let’s talk through likely scenarios.

Who will dominate mobile gaming in the next decade?

That’s really the question here, because there is no doubt that Zynga is in rapid decline. It now looks like the investment in -Ville sequels during the Schappert era was il- fated, as Mark last night guided when he talked about softness in the “invest and express” category. The future for Zynga lies in finding the next Farmville, not mining the last one.

As I mentioned at the recent Gamesbeat conference, there are more iPads in the US market than Xbox 360s. Mobile is the medium of this generation, and games seem to be the dominant channel consumers are spending their time with. While Facebook is a platform in decline, mobile is the platform of the future.

In light of that, who is best positioned? Some are starting to say Electronic Arts (EA). I heard an analyst today saying that EA was smart for not “playing in expensive acquisitions to catch up in mobile” and letting OmgPOP go to Zynga. That is, of course, ridiculous when EA purchased Popcap for over $750 million in a largely mobile focused strategy. And when EA spent tens of millions in a failed attempt to get Sims Social to be the #1 game on Facebook for purely vanity messaging to the street, only to admit later it was never a profitable title.

No, the risks for Zynga are from the next stage of startups taking big risks on “blue ocean” games where they might unlock the Farmville of the iPhone. That’s one of the reasons Zynga has smartly gotten into market of publishing third-party titles. There are also additional risks from Gree and DeNA, who in many ways are similar to Zynga but have healthier stock prices as their previous generation of games has held up longer in the Japanese mobile market.

Will Gree of DeNA or some other startup stomp Zynga in mobile? They will certainly compete, and there are some great mobile gaming startups coming up right now. But indications are that Zynga is fairing incredibly well competing in mobile, with 3 of the top 5 mobile games. They’ve pivoted to mobile strongly, just as they did from RPGs to “invest express” games before.

Right now the mobile market is jump ball and the person with the talent and execution to win can take it. Which brings us to our last question.

Is the brain drain going to kill Zynga?

Maybe. This is the real risk. Zynga has $1.6 billion in cash, so they aren’t going out of business anytime soon. In hindsight the IPO was a fortuitously timed event to ensure the company had the cash to make it through a tough transitional period. That is, if you believe they can keep their talent.

As you have no doubt noticed, some of the talent has already left the building. But, so too has plenty of dead wood with soft spines that wouldn’t have been helpful in a tough time like this anyway. Not every exit you read about is a bad one.

There are still a lot of amazing people at Zynga, but I’m sure most are itchy. They were hired into a fast growing, high risk, startup. They’ve watched a company do what a lot of companies do over time, get bloated, fill with bureaucracy, and try to solve uncertainty with austerity. That’s no recipe for success.

But Mark is, if nothing else, an entrepreneur. The company can go back to its roots, get people motivated about the risks instead of wishing them away. Mark can take some bold, even extreme, moves to show the folks he has left that he cares about them. And if he does that it would be hard to count Zynga out.

Disclaimers: I was previously in executive management at Zynga for almost two years, after selling my startup Conduit Labs to them in 2010. That said, it has been over six months since I was involved at the company and everything I am sharing here is based solely on public data. I was also, as a member of Spark Capital, involved in the acquisition of OmgPOP by Zynga, but again I have no inside knowledge of the performance of that product post acquisition. I also own a pityingly small amount of Zynga stock, but do not plan to purchase or sell any for the simple reason that I do not trade individual stocks (my risk is leveraged earlier in the startup ecosystem).