Zynga's in the black – but for how long?

While the gaming world was busy watching THQ implode last week, a funny thing happened in the background. Zynga began trading in positive territory. Boosted by Facebook's IPO filing, the social games maker finally escaped the mire of mediocrity it had been stuck in since its first day as a public company and began to grow. The question is: Is it a short-term surge or the start of a true growth curve? To put things in perspective, Zynga shares were priced at $10 when they began trading on December 16 – but unless you were an institutional investor or got a friend and family option letter from the company, you couldn't buy them at that price. Trading on the open market kicked off at $11 per share – and (after a very brief surge to $11.50) gravity began pulling the company back to earth. By the time the day was through, shares were at $9.50 – and some investors were a bit grumpy. The stock hit its low of $7.97 on January 9, but it wasn't until last Thursday that it topped the $11 mark, letting those initial investors finally recognize a gain. And while there has been a little profit taking since hitting its high, the stock's still in positive territory. The boost, of course, came with Facebook's disclosure that Zynga was responsible for 12 percent of the social network's revenues. That's a big chunk – making Zynga the primary source of non ad-generated income. And what has investors excited is there seems to be room to grow. Zynga and Facebook are joined at the hip through at least May 2015 (an agreement between the companies locked the game maker into the Facebook Credits system until that date). With Zynga likely to give some insight into its pipeline on its first earnings call on Feb. 14 and the continued strength of the social games category, there's a lot of money to be made – by both companies – in the next three years. Ironically, though, Zynga's relationship with Facebook is both its greatest strength and weakness. While it's possible the company could look for greener pastures after the agreement expires, there aren't a lot of viable threats to Facebook right now. Google Plus, while it might have notable numbers, still doesn't have the user engagement stats of Facebook – and without those, Zynga's unlikely to jump ship. Tying your company's fortunes to a single outlet, however, is risky. That's why you almost never see an Electronic Arts or Activision offer a platform exclusive AAA title anymore. One of the first red flags analysts threw when Zynga announced plans to go public was its over reliance on Facebook. And while investors are doing cartwheels about the hard numbers these days, those celebrations could have a shelf life. Facebook takes a 30 percent cut of all of Zynga's revenue without shouldering any of the expenses. Ultimately, that's a relationship that benefits Facebook more. At some point - and likely in the near future - Zynga's going to have to find another notable source of income, because competition is coming. Zynga pessimists, such as Sterne Agee’s Arvind Bhatia (who is maintaining his $7 price target on the stock), will be combing the company's numbers carefully next week, focusing on things like the numbers of unique players – and whether that's increasing substantially. They're also going to compare growth rates to what EA detailed last week, given how fast that company's mobile and social arm is growing – and its deep catalog of titles that it can leverage into the space. That skepticism isn't a bad idea for a stock that has jumped 34 percent in the past two weeks. (Any pop like that should be carefully scrutinized, regardless of the company.) And when every sign points to the growth of another technology bubble that's bound to pop at some point, it's even more warranted. So while Zynga certainly deserves kudos for breaking into positive trading territory after a rocky start, it's not out of the woods yet. And that's something potential investors, who are lustfully eyeing the company's recent gains, might want to keep in mind.