Please ensure Javascript is enabled for purposes of website accessibility

Analysts Agree: Zynga May Be the Best (Video Game) Stock on the Market

By Rich Smith – Sep 17, 2019 at 1:44PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mobile games are consolidating, and that could be good news for Zynga.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Raise your hand if you remember Zynga (ZNGA)?

Once considered the best way to invest vicariously in a then-still-private Facebook, Zynga faded in relevance after the Facebook IPO. But 2019 has seen a dramatic comeback at Zynga, where revenue is rocketing, profits are flowing -- and analysts are naming it their favorite stock in the (video gaming) world.

Last month, for example, investment banker Wedbush doubled down on its long-standing love of Zynga and put the stock its "best idea" list. And today we learn that Zynga has another fan who likes it just as much.  

Here's what you need to know.

Yellow wall painting of large fish about to swallow a smaller fish

Image source: Getty Images.

Everybody loves Zynga

Early this morning, investment bank Stephens joined Wedbush in naming Zynga stock its "Best Idea" in video gaming.

Stephens has an overweight rating and a $8.25 price target on the stock, according to our friends at TheFly.com. And with Zynga selling for less than $6 a share, that makes for a potential 38% profit from today's prices.  

But Stephens' recommendation of Zynga is about more than just the stock price.

Zynga: Empire builder

As Stephens explains in its note: "We believe the next 6-18 months will be a period of consolidation as established mobile players further leverage their core publishing infrastructure by acquiring sub-scale studios to drive growth," and Zynga itself "is well positioned [to lead any such] consolidation in the mobile gaming market."

"Zynga has ... proven [its] ability to successfully execute this strategy," argues the analyst, having spent close to $600 million on acquisitions over the past two years, according to data from S&P Global Market Intelligence. In so doing, the company has transformed itself from a business that was burning more than $50 million in cash annually as recently as just a few years ago into one generating positive free cash flow of more than $200 million ($213.5 million, to be precise) over the last 12 months.

At this rate, Zynga's last two years of acquisitions could pay for themselves in less than three years.

What comes next

And Zynga probably isn't done acquiring, either. At the heart of Stephens' recommendation today lies the banker's belief that "the potential for future deals along with the current state of their portfolio make for a very compelling risk/reward profile."

I think the analyst might be right about that.

Just three months ago, Zynga announced the issuance of a batch of "convertible senior notes" expected to raise anywhere from $584.5 million to $672.3 million in "net proceeds" after deduction of fees. Some of this money will go to corporate purposes like paying the cost of "capped call transactions" designed "to reduce potential dilution to Zynga's common stock." But the company noted at the time that it may also use the money to pay for "potential acquisitions and future transactions" -- a clear indication that Zynga has mergers and acquisitions on its mind.  

The upshot for investors

As of today, Zynga's balance sheet looks well-positioned to support such an acquisitions-based strategy, boasting nearly $830 million in cash versus total debt of only $585 million, and with more cash flowing in by the day. Growth trends look strong -- even without factoring the potential for accretive acquisitions -- with analysts forecasting that the company will post $0.06 per share in GAAP earnings this year, double that figure in 2020, and then grow these earnings to as much as $0.43 per share by 2023.

Although Zynga isn't GAAP-profitable at present, its cash flow statement confirms that the business is in fact generating copious amounts of cash. At a price-to-free-cash-flow ratio of less than 26 (and even cheaper with net cash factored in), I see the shares as attractively priced given the company's growth prospects.

If the stock can grow even faster than analysts are predicting by rolling up competitors along the way, Zynga could do even better.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FB. The Motley Fool recommends Zynga. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Zynga Inc. Stock Quote
Zynga Inc.
ZNGA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.