Zynga (NASDAQ:ZNGA) has orchestrated a successful comeback and quickly become one of the hottest and most-talked-about stocks in the video game industry. After falling on tough times early last decade as casual gaming moved away from web-browser platforms in favor of apps for phones and tablets, the company has reinvented itself as a mobile-focused publisher with a collection of bankable properties and new growth engines. 

ZNGA Chart

ZNGA data by YCharts.

The company's share price has climbed approximately 56% in 2020 and more than tripled over the last five years. Is Zynga stock still worth buying after its recent run-up? Let's take a look. 

A person holding a mobile phone.

Image source: Getty Images.

Putting Zynga's comeback in context

Zynga has thrived under the leadership of CEO Frank Gibeau, who came on board as the company's chief executive in 2016 after more than two decades at Electronic Arts. The transformation during Gibeau's tenure has had two main components: focusing more on improving monetization for leading games in the company's portfolio, and using its cash reserves to acquire studios that can power future growth. 

The company's business model hinges on releasing content updates to drive user spending across a collection of core games with long life cycles. Most of the major new additions to the company's batch of core franchises over the last five years have come from acquisitions. 

Zynga ended its March quarter with $1.43 billion in cash and short-term assets, and the company then announced early in June that it was acquiring Peak Games (a Turkish developer known for Toon Blast and Toy Blast) in a $1.8 billion half-cash, half-stock deal. With Zynga making its largest-ever acquisition with Peak, the company has taken most of its cash reserves off the sidelines to pursue a more aggressive growth phase.

What do the engagement and monetization trends say?

Big acquisitions and solid performance for its core titles have helped Zynga return to profitability and nearly double its sales over the last half-decade.

ZNGA Revenue (TTM) Chart

ZNGA Revenue (TTM) data by YCharts. TTM = trailing 12 months.

Notably, the company has been able to deliver growth despite substantial declines for its active user base. The chart below tracks Zynga's first-quarter mobile daily active users (DAUs) over the last five years: 

A chart showing Zynga's Q1 DAUs at 16 million in 2016, 18 million in 2017, 23 million in 2018, 22 million in 2019, and 21 million in 2020.

Chart by author. Data source: Zynga.

In addition to declines for DAUs, Zynga's mobile monthly active users (MAUs) have also dipped over the last few years. MAUs fell from 82 million in Q1 2018 to 72 million the next year and then 68 million in the most recent quarter. The user declines occurred even as the company made major acquisitions of Small Giant Games and Gram Games in 2018. However, overall booking and earnings trends show that the company's franchise-management strategy is paying off.

Small Giant's Empires & Puzzles and Gram's Merge Dragons! have been strong performers, and Zynga has been able to post top- and bottom-line growth despite its overall user base declining. This is possible because the publisher has been succeeding at boosting its bookings per user, with average bookings per mobile DAU climbing roughly 27% year over year in the first quarter. This trend bodes well.

Sales and earnings should see a significant positive catalyst with the integration of Peak Games. As per Zynga's estimates, bringing Peak into the fold will boost its mobile daily active user base by more than 60%. If Zynga can continue the trend of increasing monetization across its player base and get improved monetization out of Peak's titles, business performance in the near-term should improve substantially -- and there's potential for big earnings growth over the long haul. 

Long-term industry tailwinds and business opportunities

The mobile games market is very competitive, but Zynga is poised to benefit as the market expands.

A study from Mordor Intelligence estimates that the global gaming industry generated roughly $155 billion in sales in 2019. The research firm expects that the market will grow at a compound annual growth rate of roughly 9.2% from 2020 through 2025, reaching annual sales of approximately $257 billion at the end of the projection period. A report from GlobalData suggests that the industry could generate $300 billion in 2025. 

The gaming industry is growing at an impressive clip, and demand for interactive entertainment continuing to increase looks like a safe bet. Zynga's acquisitions push and focus on monetization strategies have yielded a collection of franchises that are generating dependable cash, and the company's assortment of studios will have opportunities to develop new games that reach an expanding global audience and drive growth.

Zynga has a Harry Potter puzzle game due for release in the near future, a deal with Disney to produce mobile games set in the Star Wars universe, and a partnership with Snap to develop games for the company's Snapchat social media platform. Whether any of these projects will go on to be big hits is unclear, but a single highly successful new franchise has the potential to dramatically improve Zynga's sales and earnings performance.

With a solid foundation of game franchises and the potential for explosive growth if new properties and additional acquisitions turn out to be hits, Zynga is a buy trading at roughly 30 times this year's expected earnings.