Zynga Inc (ZNGA)

[Trevor11]

ZNGA: $5-$8. IS THE FAIR PRICE, also Facebook(FB) announced…




Facebook(FB) announced…ZYNGA'S WORDS WITH FRIENDS WILL BE THE FIRST GAME TO USE IT AND IS EXPECTED TO LAUNCH IN EARLY 2018.


…A DEFENSIVE MOVE TO PROTECT ZYNGA'S MARKET SHARE.

CONCLUSIONS

...ZYNGA IS ON THE VERGE OF COMPLETING ITS TURNAROUND;

IT HAS DECENT CHANCES OF BEATING THE Q4 GUIDANCE,

Q4 IS TRADITIONALLY A GOOD QUARTER FOR ADVERTISING REVENUE.



ZYNGA: PLAY THE GAME
JAN.21.18 | ABOUT: ZYNGA (ZNGA)

MAURO SOLIS
LONG ONLY, VALUE, GROWTH, NATURAL RESOURCES

SUMMARY
THE FAIR PRICE IS BETWEEN $5-$8.


The stock price is not reflecting a turnaround.
Q4 earnings are not a big deal; Q1 guidance is the real important thing for the next earnings call.
ZYNGA (ZNGA) HAS TURNED AROUND, BUT THE STOCK PRICE IS NOT REFLECTING IT. Next earnings guidance is overly cautious, and the result will improve the optics of the stock significantly.
THE GAMING WORLD IS GROWING HIGH-SPEED AND MOBILE/CASUAL GAMING IS STILL TAKING SHAPE. Zynga has the most exposure to this trend with acceptable levels of risk. IT HAS NO LONG-TERM DEBT, AND IT WILL BE ABLE TO USE ITS PROFITABILITY TO OUTRUN SOME OF ITS COMPETITORS.

VALUATION
FOUR ITEMS ARE CRITICAL TO MAKING AN ACCURATE ZYNGA VALUATION:
• ZYNGA DOES NOT HAVE LONG TERM DEBT.
• IT HAS ABOUT $0.85 PER SHARE IN CASH AND MARKETABLE SECURITIES.
• ITS 660,000 SQF COMPLEX IN CALIFORNIA IS WORTH CONSERVATIVELY $0.15 PER SHARE
• REVENUE IS GOING UP, COST OF REVENUE AND EXPENSES ARE TRENDING DOWN.
I like to use Peter Lynch's ratio when valuing a stock. This method uses the ratio between the expected earnings growth and the P/E of the stock to determine its fair value. A stock that has a 1:1 ratio is reasonably priced. The higher the number, the more underpriced the stock is.
The current price of Zynga is $3.75; discounting the $1.00 per share ($0.85 from cash and $0.15 from their complex), the real price is 2.75 dollars per share.

Zynga's current EPS is -$0.024. Instead of comparing current EPS to the expected EPS for 2018, which would give spectacular and unrealistic growth numbers, I will assume Zynga's future EPS on the basis of the Q4 guidance. In this fashion, Zynga's EPS is $0.30, which gives a PE of 92.
Source: SEC filings
Zynga would have to grow 92% annually to be reasonably priced. To be fair Q4 guidance shows a bit of a decline in earnings but this is after having two consecutive quarters of triple-digit growth. Forecasting the 4% quarterly revenue increases (which is 1% less than what revenue grew in 2017) and maintaining 71.6% gross profit, EPS one-year from now would triple to $0.9. This growth gives a Lynch Index of 2.17.

Update 01/22/2018: For the stock to fairly price it would have to rise to 8 dollar range but, as one of my followers accurately pointed out, Lynch index typically considers long-term valuations, not yearly growths, however for companies that have recently become profitable I prefer to do iterative estimates.
Source: Seeking Alpha AMD Article The Time to buy is now
So how does the long run looks like? by next year the stock's explosive growth will be over, giving way to a more sustainable growth pattern of 47% on average until 2021, when growth appears to calm down (or more precisely, it is too far into the future to predict). WITH $0.09 EPS AND CONSIDERING CASH PROJECTIONS, THE STOCK WOULD BE ON TRADING AROUND $5.25 IN 2019 AND $7.00 by 2020. Very respectable stock price increases.
Source:Simply Wallstreet
Shall They Beat Q4 Guidance?
When looking at the income model of the company, it is easy to see that bearish revenue expectations caused the Q4 guidance earnings. The reduction of revenue guidance is most likely explained by one of the following:
1. Overly cautious guidance: I estimate there is a 50% chance of being the case.
2. A more significant decrease in web and older games: In the long run that is not worrisome and is unlikely in my opinion.
3. The fact that Q3 benefited from a bit of one-time revenue.
4. A combination of all of those factors.
ALL THOSE THINGS COULD BE OFFSET BY THE IMPORTANT JOB ZYNGA HAS BEEN DOING INCREASING ITS PROFIT MARGIN. GROSS MARGIN CLIMBED 5% IN THE LAST YEAR AND GUIDANCE PROBABLY IS NOT CONSIDERING A SIGNIFICANT IMPROVEMENT. ADDITIONALLY, Q4 IS TRADITIONALLY A GOOD QUARTER FOR ADVERTISING REVENUE.

Considering these points I believe there is a 70% chance of Zynga beating Q4 revenue, and overall it is not an exiting result. What will be exciting is to see how its acquisition of Peak Games' mobile card studio affects the Q1 earnings of 2018 and how Zynga will continue to leverage its cash for acquisitions.
VR AND OTHER GOOD NEWS
ZYNGA IS TESTING VR IN THE CSR RACING 2; the AR mode will only be available for Apple (AAPL) iPhone and iPad. Leaving aside the quality of the feature and whether or not IT WILL HELP CSR TO IMPROVE IN-APP PURCHASES, THIS INCURSION (IN MY OPINION) SHOULD BE SEEN AS A DEFENSIVE MOVE TO PROTECT ZYNGA'S MARKET SHARE. IN THIS PARTICULAR CASE, IT WILL BE HARDER FOR SMALLER COMPETITORS TO COMPETE WITH CSR RACING 2. THE VIDEO BELOW SHOWS HOW THE FEATURE WORKS.

As for Web gaming, Facebook(FB) announced it plans to launch a live streaming capability that will allow users to more easily play and share game experiences. (FULL ARTICLE HERE) ZYNGA'S WORDS WITH FRIENDS WILL BE THE FIRST GAME TO USE IT AND IS EXPECTED TO LAUNCH IN EARLY 2018.


CONCLUSIONS
ZYNGA IS ON THE VERGE OF COMPLETING ITS TURNAROUND; IT HAS DECENT CHANCES OF BEATING THE Q4 GUIDANCE, but it's way more important to see how the Q1 guidance will be. The fair stock price is in the $5-$8 dollars range. Q4 results or Q1 guidance could be the catalyst needed for this stock to launch to its fair price.

Disclosure: I am/we are long ZNGA.
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…


Source:

https://seekingalpha.com/article/4138930-zynga-play-game