Snap’s Partnership With Zynga Could Power Up Its Gaming Business

Snap (NYSE:SNAP) recently announced a new partnership with Zynga (NASDAQ:ZNGA) to develop more in-app games for Snapchat. The first new game from the collaboration, a multiplayer bumper car game called Bumped Out, was revealed at the Snap Partner Summit on June 11.

The deeper partnership isn't surprising since Zynga signed on as one of Snap's first partners for its Snap Games platform last year. It launched Tiny Royale, a top-down battle royale game for Snapchat users, last June. Let's see how this new deal could expand Snap and Zynga's gaming businesses.

Why is Snap building a gaming ecosystem?

Snapchat is primarily known for its ephemeral messages, filters, and short video "stories." Its daily active users (DAUs) grew 20% annually to 229 million last quarter, marking its fourth straight quarter of accelerating DAU growth.

Its total average revenues per user (ARPU) rose 20% to $2.02, as Snapchat's growing ecosystem of lenses, Discover videos, and games locked in users for longer periods. That content widens its moat against rivals like Facebook's (NASDAQ:FB) Instagram and ByteDance's TikTok.

Snap launched Snap Games last year alongside other developer-oriented platforms like Snap Kit, which integrated Snapchat's features into other apps, and Lens Studio, which encouraged developers to create their own lenses.

Snap Games encourages the development of multiplayer games, which boost interactions between Snapchatters. Snap hasn't disclosed its gaming business's revenues yet, but it provided a few encouraging updates over the past year.

Last July, CEO Evan Spiegel said the company already saw "a direct correlation between the number of friends playing a game together and their time spent playing games." Last quarter, Spiegel claimed the average daily time spent in games more than doubled in March as more people stayed at home during the COVID-19 crisis.

Last September, Evercore ISI analyst Kevin Rippey boldly predicted that Snap's gaming business could generate $350 million in annual revenues by fiscal 2022 -- which would be equivalent to 12% of its projected sales in 2021. It's unclear if Snap will hit that lofty target, which would significantly reduce its dependence on online ads, but the expansion of its partnership with Zynga suggests it's on the right track.

What does this partnership mean for Zynga?

Zynga's most well-known mobile games include Farmville, Slots, CSR, Empires and Puzzles, Merge Dragons, and Zynga Poker. It rose to prominence on Facebook-based games over a decade ago, but that relationship ended in 2013 after Facebook untangled Zynga's gaming platform from its social network.

Zynga struggled over the subsequent years as it faced tougher competition across the saturated mobile gaming market, but its growth improved significantly in recent quarters as it squeezed more revenues from existing users and focused on its highest-growth titles.

Zynga's revenue rose 52% annually last quarter, but its mobile DAUs declined 5% to 21 million as its mobile MAUs (monthly active users) fell 6% to 68 million. The bulls believe Zynga can keep growing its revenues per user, but the bears believe that strategy is unsustainable.

That's probably why Zynga is launching new games on Snapchat, which is still growing DAUs -- especially in the coveted Gen Z demographic -- at an impressive rate. Instead of encouraging its gamers to connect with each other on other social networks, Zynga's Snap Games could expand more rapidly across Snapchat's native audience of social users.

The key takeaways

Snap and Zynga's partnership won't move the needle for either company right away, but it could strengthen Snap's ecosystem while luring fresh users to Zynga's gaming platform. If the partnership is fruitful, other major mobile game publishers could join Snap Games and power up its gaming business.

This article originally appeared in the Motley Fool.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Facebook and Snap Inc. The Motley Fool owns shares of and recommends Facebook and Zynga. The Motley Fool has a disclosure policy.