What’s worse than missing your quarterly numbers, revising estimates downward, and having your stock nose drive below $3/share after a high of $12/share in April?

Getting hit by insider trading lawsuits, being mocked by your competitors, and today’s article being posted in Forbes “Zynga: Is the Business Really worth nothing at all?” (ouch)!  And in the words of House Stark in Game of Thrones, “winter is coming.”

It all started last week when Zynga released its Q2 earnings of $.01 earnings per share (EPS) and overall revenue of $332.5 million.  Which does not sound that bad considering it’s all micro-transactions, except Wall Street estimates were  $.06 EPS and $344.12 million.  Apparently, in investment circles, this is a huge miss.   

Many analysts downgraded Zynga, with Richard Greenfield of BTIG actually apologizing for his past bullishness on the stock.

It was only a matter of time before the lawsuits were filed, but with an insider trading twist.  As reported by The Verge, employees and early investors were not allowed to share their shares (“locked up”) until May 28, 2012.  But a small group of founders and insiders got an early waiver, selling $515 million worth of shares on April 3 when the stock was $12/share.

Most insiders sold 15% of their holdings which is a common diversification strategy (aside from former-COO John Schappert and CFO David Wehner, who sold up to 50% of their holdings according to the New York Times).  As many in the industry discuss, these are smart folks so there probably was not any impropriety involved.  But, the facts on the ground look suspicious enough for 5 insider trading lawsuits to be in the works.  Zynga is such a data-driven company, its tough to believe that the people on top did not see something dropping.

And this can’t be good for employee morale.  Zynga prides itself as a meritocracy, so it’s a bit Animal Farm-like that everyone is equally locked out but some insiders are more equal than others and get to sell shares at the high.

Zynga blamed its earnings weakness on the delay of the game launch of The Ville, weakness in revenue numbers for Draw Something (the game it just bought with OMGPOP), and an algorithmic change by Facebook that sent less users to Zynga games than before.

This last comment raised the flag for its competitors, as Wooga, Crowdstar, and every social game company with a PR firm posted press releases that they were not impacted by any change by Facebook and that their numbers are doing fine.  Electronic Arts released better than expected earnings signalling this could be more an issue with Zynga and not social gaming as a whole.  

So, where does Zynga go from here?  The good news is that still has the top games on Facebook, $1 billion+ in cash on hand, and a growing mobile business.

There is a lot of bad news, though.  Social gaming is shifting to mobile from just Facebook.  Zynga may be king on Facebook, but they are just one of many princes on mobile devices like iPhone and Android.  Their hit games, Words with Friends and Draw Something, are big draws for their number of players, but are bad at monetizing the traffic.  So, they are not in as a good a position as they would like to be in mobile.  

The issue is that to win at mobile, Zynga needs to produce a Rage of Bahamut like hit as Mobage has.    

Based on their short history, Zynga is great at taking a hit game someone else is doing and upping the production values adding some innovative twists.  But they have never looked at an entirely different genre like card collecting and gone crazy and create a super mobile hit like Rage.   Despite buying tons of talented game developers, it just may not be in Zynga’s DNA to do so.  Throwing all the data out the door and designing something brand new that takes advantage of latest smart-phones is the only way to get noticed and win on mobile.

Other issues for Zynga are that there is FarmVille fatigue and that there is no guarantee FarmVille 2 will be a success (Mafia Wars 2 was a failure, effectively killing the franchise).  

The one glimmer of hope for the future, casino gaming (every time an article mentioning Zynga and legalized gambling is released, Zynga’s stock pops), is many years off in the future and Zynga’s not a sure bet to win in this space.  Aside for the fact that millions of people play Zynga Poker and its new catalogue of social gaming titles, Zynga has no experience nor expertise whatsoever in the highly regulated gambling market.

Which brings us back to Forbes’ “is Zynga worth nothing” article.  Forbes makes a case that with today’s share price of $2.8/share, the company is worth $2.14 billion, compared to a total of $2.5 billion in net cash, investments, receivables, and plants and equipment.  Hence, Wall Street values Zynga as nothing.

Yet the company does have 300 milion monthly users, $663 million in revenue in the past 6 months, huge talent and social game franchises.  Clearly, Zynga is something.  

As Forbes rightly suggests, Zynga could make for an interesting takeover target.  I don’t know who has the money and gall to  go for it (Tencent or someone else from Asia?), but it should be an interesting winter for Zynga.