Is a Zynga Recovery in Store?

Zynga (NASDAQ: ZNGA  ) shares advanced 7% after UBS recently reiterated its "buy" rating, and investors ponder the likelihood of a recovery. Is it likely that a Zynga recovery is in sight, or should investors favor King Digital Entertainment (NYSE: KING  ) to become the next Activision Blizzard (NASDAQ: ATVI  ) ?

Is this stability?
According to UBS, Zynga management remains focused on executing 2014 guidance, NaturalMotion integration, maximizing value, and increasing operating leverage. UBS has reiterated its "buy" rating and $6 price target, nearly double Zynga's current stock price.

While every analyst is entitled to his or her own opinion, UBS is painting a picture where everything's running smoothly, and assuming that management will meet all of their goals. In fact, UBS even said that it expects Zynga to be a beat-and-raise story, referring to earnings going forward. But in many ways, this positive outlook tends to argue against much of what the company has told us.

At a Bank of America conference last week, Zynga CEO Don Mattrick held a question-and-answer session that consequently caused shares to decline nearly 10%. In the conference, Mattrick said that the company's audience has stabilized, but at the same time he also warned of historically weak summer months ahead.

Another big announcement was that the company's employee count had fallen to 1,800. Keep in mind, Zynga had more than 2,600 prior to his tenure, and the company also incorporated NaturalMotion's staff. That means there have been some major cuts at the company, and combined with the possibility of a rough summer, that's not what most would call stable or flawless execution.

The always unpredictable
Zynga has lost about three-quarters of its valuation since its 2012 post-IPO stock highs, and new initiatives such as mobile games, like Farmville, have many believing that Zynga could be a turnaround stock. However, if we look at analysts' outlook, expectations are quite high already.

Specifically, analysts expect growth of 12% and 20% in 2014 and 2015, respectively, which essentially banks on stabilized daily and monthly active users along with the company capitalizing with another big-time game release in the next year, both of which are always unpredictable.

Where's the next Activision?
With two new game consoles in the last year, growing mobile gaming use, and expectations for new gaming platforms, it's no surprise that investors might see value in this space. However, Zynga might not be the best way to go.

King Digital is very much like Zynga in 2012, although the difference is that Candy Crush is much larger and more played than Farmville was at its peak. Yet, due to the rise and fall of Farmville, investors approach King with caution, which has resulted in a stock trading at 9 times earnings for a company that just grew first-quarter revenue by 195%, year over year.


Source: King Digital

As you might expect, investors watch quarter-to-quarter performance as a way to spot trouble before it hits, which bodes well for King Digital. Specifically, Candy Crush as a percentage of total bookings did decline from 78% in the fourth quarter to 67% in the first quarter. However, King's total bookings increased nearly $10 million to $641.1 million, thus showing that its other games are growing in popularity; King has three games ranked in the top 10 on Apple AppStore and Google Play.

As you can see, King is not just a one-trick pony, but rather has three top games, and despite slowing user growth of Candy Crush, it has been able to combat losses with the growth of other games. For reference, Activision Blizzard is considered one of the top game companies in the world, with $4.3 billion in annual revenue, and expected growth of 8% this year.

Yet, despite its countless game titles, much of Activision's revenue is derived from two blockbuster franchises, Call of Duty and Skylanders, and the rise of a third, called Destiny. Therefore, for gaming stocks, it's typical for two or three games to drive fundamentals. This bodes well for cheap and undervalued King, a company that might not become the next Zynga, but rather the next Activision.

Final thoughts
With all things considered, Zynga shares are volatile for a reason, and that's because no one knows what to expect. So, what's the best way to play Zynga right now? The best answer is most likely to do nothing until the future becomes clearer. Instead, capitalize on the clear value of peers like King Digital, which seems to be operating a strategy for longevity.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2014, at 5:44 PM, z06forum wrote:

    A little cofusing about you are implying your words

    What has the company told us that contradicts their Growth guidance??

    ~ "In fact, UBS even said that it expects Zynga to be a beat-and-raise story, referring to earnings going forward. But in many ways, this positive outlook tends to argue against much of what the company has told us."

    The company "ZYNGA" has clearly outlined and Increased guidance and growth contrary to what you just mentioned in your article. What Outlook are your referring too? Multiple new games coming out in the back Half of 14 and well into 15.

    I am sure they have included anticipated gains from those future franchise hits.

    Qtr over Qtr improved mettricks should continue in Q2.

    ZNGA near a 52 and historical low seems to be a smart bet for an investor with Clear vision. Mobil Gaming is in the same spot as the Internet in general in the early days. ZNGA will come out a Leader in the category in my opinion and will show signs of Dominance within the next 12 months.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2992087, ~/Articles/ArticleHandler.aspx, 9/2/2015 6:56:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 3:59 PM
ZNGA $2.50 Down -0.03 -1.19%
ATVI $27.86 Down -0.77 -2.69%
Activision Blizzar… CAPS Rating: *****
KING $13.41 Up +0.08 +0.60%
King Digital CAPS Rating: *