Is Zynga Finally Worth Gambling On?

Shares of Zynga (NASDAQ: ZNGA  ) got rather bubbly after the company went public, eventually hitting a market capitalization that, at its peak, exceeded those of gaming giants such as Electronic Arts (NASDAQ: EA  ) . Interestingly enough, as shares of game publishers, in particular EA's, have been on the rise (especially as it has been on a roll with hit releases such as Titanfall), social media has gone out of favor. With Zynga technically qualifying as both, and with the shares trading well off of its 52-week highs, it's worth taking a look to see if the shares are a bargain or simply a trap.

The underlying business is down year on year, but there's hope
While Zynga makes games, its business profile is very much social media, with audience metrics strongly influencing business performance. That said, if you look at the company's revenue trends as well as its audience metrics, you'll see some interesting trends.

Source: Zynga.

First, notice that daily active users and monthly active users -- DAU and MAU -- had been on a downward spiral since peaking in Q1 '13. However, in the Q1 '14 results, we saw a quarter-over-quarter bounce in all of these key metrics.

Source: Zynga.

Moving on to Zynga's bookings, we see that the numbers there largely reflect the audience metrics. In this case, it is much more useful to look at bookings rather than revenues. As explained very nicely over at Business Insider, bookings represent the actual money spent by users on virtual products during the quarter, and revenues simply refer to the sales of the virtual goods amortized over the expected life of those goods.

In addition to the fact that Q1 '14 is looking nicely up, the guidance for Q2 '14 bookings is expected to be in the range of $175 million to $195 million, which would suggest a continued upswing in the company's underlying business.

Is the stock worth buying here?
Zynga's business seems to be improving while the stock price remains stuck near 52-week lows. Intuitively, improving business prospects for such a hated stock should mean that the shares trend upward. However, the question is just how much of that "recovery" is baked in and what kind of risks investors will see to continued performance.

The company has about $0.88 a share in cash and no debt, and -- if you believe current sell-side consensus -- is on track to earn about $0.02 a share this year and then $0.06 a share next year as revenues grow 12.2% and 20.20%, respectively. At 40 times next year's earnings, ex-cash, Zynga isn't exactly cheap, and that number does bake in some pretty serious growth assumptions. However if Zynga can keep revenues growing at a double-digit clip while keeping costs under control, there could be some pretty nice leverage that drives pretty nice longer-term growth in earnings per share.

Foolish takeaway
Zynga operates in a business where both visibility is limited and games live and die by a whole host of subjective factors. The good news is that the business appears to have bottomed and is headed in the right direction. So for investors looking to take capitalize on a potential turnaround, it may be worth considering a small speculative position. However, this isn't a stock to "load up the truck" with, particularly given the inherently risky nature of the business. 

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  • Report this Comment On May 24, 2014, at 8:52 PM, speculawyer wrote:

    Sure . . . put your Money on Don Mattrick. He did such a great job with the Xbox One!

  • Report this Comment On May 26, 2014, at 2:40 AM, Mark2013 wrote:

    Funny title.

    I'd not consider buying ZNGA to be a "gamble" when one is dealing with a company that has ZERO in debt and a book value of over $2 per share and many other positive things going on.

    Stocks often trade at multiples well above book but to be conservative, I'd go with 3 times book although many are trading at multiples far above that but going with reason that places the value of ZNGA at $6.75 per share at this given time thus; ZNGA is undervalued!

    I'm no stock Broker. My Brokers license is in Real Estate but I have been investing and trading since the year 1980 and know a great value when I see one thus; I am buying yet never telling others to buy, sell or hold anything.

    I am long ZNGA and likely to add shares in next 72 hours. I will be happy to dump them on you at $10 per share just like I did First Solar after buying at $13 and selling at $50 and many others :)

  • Report this Comment On May 26, 2014, at 3:20 AM, TMFAeassa wrote:

    Hi Mark2013 --

    I'm happy to hear about your success with First Solar and hope you see similar success with ZNGA.

    Fool on!

    --AE

  • Report this Comment On May 27, 2014, at 8:28 PM, LasVegasPoker wrote:

    Zynga and Las Vegas Worldwide on-Line Gaming www.LVWSPoker.com or www.LVWSOP.com

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