ZNGA: STOCK,PICKS,BY,HEDGE,FUNDS,LIKE,CAPITAL,WORLD,OUTPERFORMED,MARKET,132%
x1power, first thanks for your very good question.
As Always may you and yours be Blessed
Trevor
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"... Zynga's valuation has potential to be significantly higher."
Capital World Investors Believes In Mark Pincus
Jun. 15, 2015 9:28 AM ET About: Zynga (ZNGA)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
Capital World Investors has accumulated 10.2% of Zynga’s float.
Pincus’ strategy of dropping non-core games such as Tiger Woods Golf and focusing on Zynga’s core franchises is a good one.
With $950 million in cash and no debt, Zynga can keep the lights on for years and introduce new versions of its core franchises until it becomes solidly profitable.
By Jay Smith
Zynga (NASDAQ:ZNGA) is a classic case where rapidly rising engagement metrics don't necessarily lead to profits. Although hundreds of millions of people played Zynga games, Zynga lost money for most of its public life. The company lost $1.40 a share in 2011, $0.28 per share in 2012, $0.05 per share in 2013, and $0.26 per share in 2014.
Zynga has not been profitable because it missed the mobile shift. Because its games were not suited for mobile screens, users spent more time playing mobile developer games instead of Zynga's, decreasing Zynga's overall revenues. Because its revenues were weak and its costs were high, Zynga lost money.
When things go wrong, companies bring in new management to make things go right again. In Zynga's case, Zynga founder Mark Pincus retook the reigns.
Under Pincus, Zynga will play it tight, cutting costs where it can and playing only the hands that favor it. The company plans to lay off 364 employees, or 18% of its workforce. The company also plans to reduce spend on outside services, saving $55 million per year. Management hopes that its cost cutting measures will save Zynga $100 million annually, adding $0.10 per share to adjusted EBITDA.
Zynga is playing only the hands that favor it by focusing on several core categories that it has healthy franchises in. By producing games mainly for the categories of action strategy, racing, social casino, invest & express, and casual, Zynga is taking a page from Hollywood movie studios and building sequels and spinoffs to existing hits rather than spending money on unknowns that could hit or miss. Because many of Zynga's 100 million monthly active users and 25 million daily active users are familiar with Zynga Poker, FarmVille, or Words With Friends, they are more likely to try the new versions, increasing adoption and profitability. Zynga's new games will also be mobile first to increase engagement.
Depending on how well the company's mobile versions are received, Zynga shares could outperform. Analysts have low expectations, expecting the company to earn lose $0.02 per share this year and earn $0.05 per share next year. All it takes is for one of Zynga's games to become the next Kim Kardashian: Hollywood, and Zynga's stock will receive a much needed boost.
Another factor that could lift Zynga shares is the news that Capital World Investors has accumulated over 80 million shares of Zynga, up from the 47 million shares it had at the end of Q1. 80 million shares is a big position, good for 10.2% of Zynga's float. Capital World Investors' position is a big vote of confidence in Zynga's future and Pincus' strategy.
Following small cap hedge fund picks such as Capital World Investors' is a good way to generate alpha. Our research shows that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012. These stocks managed to return more than 132% over the ensuing 2.5 years and outperformed the S&P 500 Index by nearly 80 percentage points (read the details here).
... Zynga's valuation has potential to be significantly higher. With $950 million, no debt, and the anticipated $100 million in annual savings from cost cutting, Zynga will have many years to try different iterations of its core franchises until it finds one that will make the company solidly profitable.
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Source:
seekingalpha.com/article/3258595-capital-world-investors-believes-in-mark-pincus
