Is Zynga a Multi-Bagger Now?
By Moustafa El Zanaty - September 10, 2012 | Tickers: ATVI, FB, ZNGA | 0 Comments
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
Facebook (NASDAQ: FB) has had a bad go of it lately as their shares hit a new low before labor day, but sometimes a little perspective is all one needs. Their once close partner Zygna (NASDAQ: ZNGA) has lost considerably more market value this year. They hit a high of $15.91 but since that time have had a Sirius XM type implosion trading at $2.80 a share. Unfortunately for Zygna the more negative news that is released about Facebook the worse their stock does, as they derive most of their revenue directly from the social media giant. Zygna has been a real cash generating machine since its inception, being the founder of social media based games while releasing a string of addictive hits like FarmVille. Its detractors point to it deriving effectively all of its revenue from its Facebook partnership. Though this is true, having a user base of 900 million users is not all bad and Zygna has made several announcements indicating its desire to move away from solely Facebook based social games.
Problems at Home
Zygna’s troubles are definitely not all Facebook’s fault as they have seen an executive exodus from the company recently which in any business is never good news. There were also several reports of a very poor company culture, and as the share price tumbled an explosion of Zygna programmers applying for jobs at other companies. Zygna in what many believed was a poorly timed acquisition, purchased popular social game maker OMGPOP for $180 million. Investors have responded harshly as the shares have headed downward steadily. This is not aided by the fact that gaming is a very fickle industry and the market has been looking unfavorably on many of the companies in the industry. Activision Blizzard (NASDAQ: ATVI) the video game maker with perennial hits and legendary games has rolled out hit after hit yet the companies shares are stagnant. In South Korea there is a professional Starcraft league with 6 figure prize money. People are so passionate about their games that they televise matches between well-known gamers. All this to say, as a fan of Activision I sold my position in them last year after watching only good news come from the company and a share price that would stay in a range of $11 to $13. If the heavy hitters are having trouble keeping market favor a company like Zygna is in tough.
Pot of Gold at the End of the Rainbow
After the share tumble, executive exodus, acquisitions and falling out of favor in the market, Zygna is still here. With their shares trading at $2.80 there is an opportunity to purchase a company that was pushed far too low by negative sentiment. I have trouble when a company who is still operating has a cash balance that equals roughly $2.30 a share and the rest of the company is valued at $.50 a share. I feel that Zygna right now was never worth $16 a share, but I also see it worth more than $.50 a share after cash its cash balance. They are also looking to begin hosting their own social games which could begin to separate the company more substantially from FB. Zygna is trying to move into real money social gambling as well and is already capitalizing on their very popular Texas Hold’em game. With big money backers stateside trying legalize online gambling this could be a potentially lucrative market for Zygna. Facebook for its part has shown an interest in adding real money gambling to its offering as it is rolling out a service in the U.K. which is a highly regulated gambling market to see how it goes. Zygna is one hit game or service away from getting right back into the saddle.
Moving Forward
Zygna has many options, no debt and cash. They have experience in their market as they were the ones who created it, and are actively looking for ways to grow and expand their business. The likely hood that Zygna goes out of business or tumbles significantly lower in my opinion is unlikely. They are too valuable to Facebook for FB to allow them to go under. If they continue to struggle they will become a prime buy out target which could earn investors a premium. Zygna at $2.80 is a solid buy for risk tolerant investor looking for a company that could easily rebound quickly into a 1 or even 2 bagger.
