There’s an old investing maxim that you can never fool the same group of shareholders twice. Once burned, they simply ignore you.

#-ad_banner-#The only way to beat that problem is to find an entirely new group of shareholders that may be unaware of your past history.

More than two years ago, I cautioned that game seller Zynga (Nasdaq: ZNGA) looked to be a flash in the pan. Still, a few months after its IPO, hype and hope had pushed Zynga’s market value to above that of legendary toy maker Hasbro (NYSE: HAS).

We knew that couldn’t last. Indeed, shares of Zynga, which soared into the teens, eventually plunged below $3. The executives at Hasbro had nothing to worry about.

Well, a new group of investors believe they have discovered a hot new growth stock. And they suggest Zynga is positioned to become a long-term presence in the online gaming world.

History says otherwise. And this stock may soon start to move back toward its multi-year lows.

Credit Where It’s Due
To be sure, Zynga’s new CEO, Don Mattrick, has stabilized operations since he took the reins last summer. He’s radically cut costs, acknowledging that a game maker with only a few popular titles did not need an army of game development engineers. He also realized that the newest games the company was developing weren’t getting a lot of buzz.

How bad did things get? Sales plunged 31% in 2013, to $873 million, and the company has lost a combined $670 million in three years.

Going Mobile
The recent rebound in the stock isn’t due to Mattrick’s cost cuts but instead to a pair of growth initiatives.

	Flickr/kawanet
	Zynga has been one of the hottest stocks of 2014, but management will be hard-pressed to deliver the solid growth that the share price seems to anticipate.

First, Zynga has recently made a stronger commitment to a mobile strategy, helping to wean itself off an overwhelming dependence on Facebook (Nasdaq: FB) for its success. The launch of three popular titles in a mobile version earlier this month was the catalyst for a fresh move to 52-week highs.

Yet some of Zynga’s bulls say it is the January acquisition of game maker NaturalMotion that will send this stock higher (indeed, it already has). That firm has developed a reputation for strong technology and a high level of creativity in the game development process, traits that Zynga was not noted for.

Revving up the game development process is crucial as once-popular titles such as “Farmville” and “Cityville” lose momentum. The acquisition of NaturalMotion holds the promise of a more robust game development team. Yet Zynga paid an awfully stiff price ($525 million in cash and stock) for a company that had $62 million in sales in 2013.

The key takeaway: NaturalMotion didn’t exactly have any blockbusters on its hands either. Its “Clumsy Ninja” title, which initially drew a lot of buzz, quickly fell out of the top 10. Zynga projects that NaturalMotion’s contribution to 2014 revenue is unlikely to exceed $70 million or $80 million.

So what does this company looks like on a pro forma basis? Sales are expected to grow around 10% this year, which means that excluding the acquisition, the core Zynga business will be flat this year.

Soon enough, Zynga will again be measured simply by its ability to boost sales and generate profits. And this is where deeper concerns arise.

For starters, investors shouldn’t assume that the NaturalMotion deal will reap a big payoff: “Zynga has not provided a product plan, and employee turnover and acquisition integration makes execution more (not less) difficult,” note analysts at Merrill Lynch, who rate shares as “underperform” with a $3.80 price target. Consensus forecasts call for 15% revenue growth in 2015 as the rebuilt development team delivers more popular titles. But analysts are really only guessing.

Moreover, ZNGA has now become a very expensive stock. Analysts expected to see 2014 earnings before interest, taxes, depreciation and amortization (EBITDA) of around $220 million, yet the current enterprise value stands at around $4.2 billion (subtracting $391 million paid to NaturalMotion at the end of January and assuming shares outstanding of 985 million). That means shares trade for nearly 20 times projected 2015 EBITDA. Such a lofty multiple is rarely justified and usually reserved only for companies in the midst of sustained strong revenue growth over multiple years.

Yet you can’t apply that logic to game makers. Even if a strong title or two gives them a sales boost in any given year, such growth is rarely sustained. It’s a fickle business with erratic revenue streams, not worth a very high EBITDA multiple.

Said another way, shares of ZNGA are now worth more than four times sales, but rivals such as Electronic Arts (NYSE: EA) and Take-Two Interactive (Nasdaq: TTWO) trade for around two times sales.

This business is likely worth closer to 10 times projected 2015 EBITDA, or around $2.15 billion. Add in Zynga’s pro forma net cash of around $1.2 billion, and the target market value would be around $3.3 billion to $3.4 billion. That works out to be a share price just below $3.50. In coming quarters, as it becomes apparent that the pricey acquisition is a help, but not a game-changer, then shares will be hit by profit-taking.

Risks to Consider: As an upside risk, Zynga and NaturalMotion could come up with a blockbuster new title that forms the basis of a franchise, but such hits are few and far between.

Action to Take –> Zynga has been one of the hottest stocks of 2014, but management will be hard-pressed to deliver the solid growth that the share price seems to anticipate. The company will be delivering first-quarter results and forward guidance in about a month, and momentum investors may be quite disappointed. You can track the current weekly sales trends for Zynga’s games before the first-quarter figures are released to get a sense of the company’s current games are maintaining or losing traction.

P.S. If you’re looking for a more time-tested business model than video game development, you should check out our Top 10 Stocks for 2014. Stock #3 gives you a stake in dozens of infrastructure monopolies across the entire world. It owns electric grids in Chile…. railroads and coal facilities in Australia… toll roads in South America… and timberland in the United States and Canada. To learn how to get the name and ticker symbol of this stock — along with the rest of our Top 10 Stocks for 2014 — click here now.