Zynga vs. King Digital: Which is the Better Social Gaming Stock Today?

Zynga is executing a comeback in the gaming market, but fresh competition from King could shift the tides.

May 21, 2014 at 3:00PM

Social game players are fickle, which makes it especially difficult for investors to determine which social gaming stocks will outperform rivals in the space. There was a time when Rovio, for example, was on top of the world thanks to its popular game Angry Birds. However, the Angry Birds maker hit a wall recently, underscored by a 52% profit decline in 2013 . Now, investors' attention has shifted to a possible turnaround in Zynga (NASDAQ:ZNGA) stock, and the newly public social game maker King Digital (NYSE:KING).

Social games will account for as much as 50% of the video game market by 2016, according to Game Summit . This creates an opportunity for certain game makers in the space going forward including Zynga and King. It is in this spirit that we'll look at each of these names to uncover which one is better poised to reward investors in the quarters to come.

Gaming the system
When it comes to free-to-play gaming companies, monthly unique payers, or MUPs, and bookings are two of the most important metrics to watch. MUPs tell us the number of unique players who made a payment at least once in a given month . This can help investors understand how efficient said company is at converting players into paying users.

Bookings, on the other hand, represent the company's non-GAAP  revenue including the amount of money they make from in-game purchases of virtual goods . Therefore, bookings give investors insight into how well a company like Zynga or King is monetizing its user base.

During Zynga's most recent quarter, the game maker generated $161 million in bookings. While this might seem like a lot at first glance, it marks a 30% decline in bookings from the same period a year ago . Moreover, Zynga's ability to monetize users is even less compelling when compared to King's first quarter bookings of $641 million for the three months ended March 31, 2014. As you can see from the side-by-side comparison below, King Digital also trumps Zynga in terms of monthly unique payers today.


Monthly Unique Payers (MUPs)

Growth Percentage


1.4 million 


King Digital

11.9 million

190 %

Based on these results, King is significantly better than Zynga at converting free-to-play users into paying customers. Armed with that knowledge, let's now look at these companies in terms of recent stock performance.

Playing the market
The past few years haven't been kind to Zynga. Its stock has fallen more than 66% to trade around $3.33 per share, down from its initial public offering price of $10 a share in 2011 . Zynga fired as many as 520 employees or roughly 18% of its workforce, less than a year ago . And the company has continued to shuffle its top management since hiring former Microsoft exec Don Mattrick as its chief executive last July .

Nevertheless, Mattrick's experience overseeing Microsoft's Xbox division should help him lead Zynga's comeback. Moreover, he appears to be the right guy for the job as Zynga's loss has continued to shrink quarter-over-quarter since he took the helm last year . Today, Zynga's stock trades at a price to sales ratio of 4.59, this suggests the stock is expensive because it is significantly above the industry average PS ratio of 2.96. Therefore, until investors really see a uptick in Zynga's bookings and MUPs, King Digital looks like the better pick here.

King became a publicly traded company in March, and had the worst opening day of any initial offering in the U.S. markets this year -- shares finished the day down 16 %. However, it's not game over for this company yet. For starters, King Digital is profitable today, unlike Zynga.

With its stock now trading near the low end of its 52-week range, there is an opportunity for patient investors to get in at an attractive price. Shares of King Digital currently trade around $16 a pop. Moreover, King has a price to sales ratio of just 2.6 -- below the industry median . Together these things prove that King is the better stock to own today, whereas Zynga still needs some time to win back investor confidence.

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Tamara Rutter owns shares of Microsoft and ZYNGA INC. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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