Zynga Inc shares fell as much as 18.6 percent on Friday morning, 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 $2.75 from $3.00.
Zynga's gambling efforts kicked off this year in Britain, but gambling with real money is illegal in many U.S. 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 percent of its monthly active users in the second quarter. Revenue fell about 20 percent.
In contrast, monthly active users jumped 21 percent to 1.15 billion for Facebook Inc, from which Zynga got 86 percent of its revenue last year.
The games developer has been trying to establish a more independent network, even at the risk of getting less visitors from Facebook.
"As the market has shifted from FB gaming to mobile, Zynga has been unable to replicate its success that was predicated not on great games, but on great network effects and first-mover advantage on FB," Macquarie analysts said.
Zynga CEO Mattrick said on Thursday he intended to take the company "back to basics" with an emphasis on free-to-play games on Apple Inc's iOS and Google Inc's Android platform, as well as tried-and-true franchises like "FarmVille."
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.
"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."
Zynga shares were down 16 percent at $2.93 on the Nasdaq on Friday. Nearly 49 million shares were traded by midday, twice the stock's average 10-day volume.
(Reporting by Supantha Mukherjee and Sruthi Ramakrishnan in Bangalore; Editing by Joyjeet Das)