Every investor wants to bet on a stock that can beat the market. And Zynga (NASDAQ:ZNGA) might have what it takes to pull this off in the red-hot mobile gaming industry. Let's dig deeper into how the company's acquisition-driven strategy could help it pivot to new opportunities and unlock long-term value for shareholders.
A red-hot industry
Analysts expect the $77.2 billion mobile gaming industry to expand at a compound annual growth rate (CAGR) of 14% until 2025 because of improving technology and higher smartphone penetration. That's compared to the console gaming market, which is expected to decline at a CAGR of 4.9% over the same period.
Zynga is a great way to bet on this opportunity because it focuses on mobile games and has lower exposure to slower-growing sides of the industry. Rivals Activision Blizzard and Electronic Arts both have mobile gaming subsidiaries. But they earn most of their revenue from PC and console games, while Nintendo has wound down its mobile business to focus on its better-performing console business.
But unlike Nintendo, which tends to develop its own games and IP, Zynga's business model relies on purchasing already established studios to power expansion, unlock synergies, and pivot to new markets.
A unique acquisition-driven strategy
With $1.4 billion in cash and equivalents on its balance sheet, Zynga has built what CEO Frank Gibeau calls a "war chest" to pursue its acquisitive strategy. Zynga aims to consolidate the industry by combining high-performing assets and development teams into one corporation. This strategy can help it quickly expand into new opportunities.
In May, Zynga agreed to buy mobile advertising firm Chartboost for $250 million -- giving it access to Chartboost's 700 million monthly active users and bolstering its mobile advertising segment (roughly 16% of 2020 revenue). This acquisition follows the purchase of Echtra Games in March, designed to help Zynga develop cross-platform technology, which allows users to play the same game software over different hardware platforms.
Betting on growth
Zynga's revenue grew 59% to $1.7 billion in 2020. And management expects the top line to expand to $2.6 billion (up 32%) in 2021. With a price-to-sales multiple of 5.2, the market is pricing in much of this growth. But Zynga stock is still competitively valued compared to Activision Blizzard and Electronic Arts, which trade for 8.7 and 7.1 times sales, respectively.