Is This The Best Time To Buy Zynga?
Apr 23 2014, 4:30 | by IAEResearch | about:ZNGA
includes:FB, KING
Summary
The company has made impressive progress on its mobile strategy.
There is limited downside and substantial upside potential in Zynga at current price levels.
The launch of "words with Friends" and "Zynga Poker" on mobile should further enhance company's position in the segment.
The capital markets sometimes behave strangely and allow the savvy investors to make substantial gains. Recently, the IPO of Candy Crush developer, King Digital (KING), caused the other companies in the sector to lose value as the investors diverted some funds to the new equity entering the market. The response to the IPO, however, was not a welcome one as the King stock lost substantial value on the first day, and the stock is still down more than 7% of its IPO value.
Zynga (ZNGA) had a very good start to the year as the company reported better than expected results. However, during the last month, the stock has lost more than 9% -- in the last five trading days, the trend in the stock price of Zynga has reversed and the stock is on an upward trend. The company is going to announce its earnings for the first quarter on Wednesday, April 23. The market is expecting Zynga to post impressive results, which has caused the stock to make a rally over the last few days. I believe Zynga is still cheap despite the recent rally due to the solid steps taken by the management to grow the business of the company.
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The company is making solid inroads in the mobile segment - Zynga's inability to penetrate the mobile segment was a major criticism of the company in the past. However, under Don Mattrick, the company has been making progress in the mobile category. The company has been heavily dependent on Facebook (FB) in the past, and it will need to be less dependent on Facebook in the mobile segment in order to grow. With the acquisition of NaturalMotion, the company's mobile portfolio has been enhanced substantially. The acquisition adds some variety to the offerings of the company. Furthermore, Zynga has released its famous game, Farmville 2, for the mobile devices and the game does not need integration with Facebook.
The release of Zynga's most popular game on the mobile platform is a step in the right direction and it will support its efforts in gaining a larger presence in the mobile space. The mobile version of the game allows the players to transfer goods from the Facebook version and it also allows the players to play in offline mode in case the device is not connected. The announcement was well-received by the market as it also played a part in the recent rally by the stock. The majority of Zynga's new games (around 75%) will be for the mobile devices as the main focus is on the mobile space. We are likely to see mobile versions of "Zynga Poker" and "Words with Friends" over the next few months. Zynga Poker is one of the most important games for the company in terms of monetization - the company sells virtual chips to a large number of its users. Zynga's mobile app for the game will be focused on enhancing the experience and making it easier to play on smaller screens.
Comparison between King and Zynga is not fair in my opinion as both the companies are different in their approach. Furthermore, King might face problems as the majority of its revenue comes from Candy Crush, and the bookings for this game are already on the decline. On the other hand, Zynga has a better portfolio of games, which should give its revenues considerable diversification going forward. As a result, Zynga is a better investment option compared to some of its peers.
Moving onto the valuation - despite the recent rally, I believe Zynga is attractively priced. I wrote an article about Zynga about two months back. I valued the stock for liquidation and determined the downside in Zynga - the liquidation value of the stock is around $2.85 per share, which represents downside risk of about 36%. However, I believe the company is in even better position to grow as it has started to show its growth in the mobile segment. The strategy of the company is paying-off and we should see further movement on the mobile strategy as the company launches "Words with Friends" and "Zynga Poker" for the mobile devices.
Bottom Line
Zynga is a very good turnaround play - the company is executing its strategy well, and its mobile portfolio is getting better. There is limited downside to Zynga with a considerable upside potential over the next 12-18 months as the company increases its presence in the mobile space. The company is slowly gaining a better recognition in the mobile space and its dependence on Facebook will decrease through the launch of its own mobile versions of its popular games. Zynga investors need to be patient and hold onto the stocks as I believe the stock will make a move over the next 12-18 months, and it will be trading substantially higher than its current levels. For investors willing to take some risk in order to make some speculative gains; this might be the best time to buy.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investors are urged to do their own due diligence before making any investment decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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