Mobile game developer Zynga (ZNGA) lets gamers play for free. To generate revenue, it sells in-game content and displays ads. And while the ad business isn't the biggest revenue stream for Zynga, it figures to be a more important piece of the puzzle in the future.
In this video clip from Motley Fool Backstage Pass, recorded on Sept. 13, Fool contributor Jon Quast talks about a recent acquisition by Zynga and how it can improve this business going forward.
Jon Quast: So the company that I wanted to bring was Zynga and we talked about it earlier. In mobile gaming, Zynga is a really attractive opportunity to me for a couple of reasons.
One, it's because they have this great, I don't know if you want to call it intellectual property, but these well-known franchises that have been around for years that people love. Whether that's Farmville or other games that Zynga produces. You know these games, you play these games, and they have longevity. It really provides somewhat of stability.
Beyond that, those games generate revenue with in-app purchases, but they've been getting into advertising more and more. Clay mentioned it earlier, they acquired a company earlier this year called Chartboost. By buying Chartboost, Zynga has become really an advertising-technology company in disguise.
If you look at companies like PubMatic, The Trade Desk, these are pure play advertising technology companies, very good gross margins. They have upwards of 70% in Trade Desk's case, over 80% gross margins. That's really the opportunity that advertising brings to Zynga.
One of the things that you've got to think about, and I'd beat this like a drum on Motley Fool Live and Backstage Pass, so I'm not bringing specific numbers today, but just the big shift that's going on in advertising. Going away from traditional advertising mediums like billboards and radio commercials, that you can't measure your return on investment if you're a company. Moving to digital channels where those ad dollars can be tracked, they can be analyzed. You know exactly what return you're getting.
This is a massive shift taking place. In fact, there aren't enough digital ad spots to meet all the demand that's coming in and ad rates are going through the roof. This benefits a company like Zynga big time. In the most recent quarter, total revenue up 59% year over year. Daily users up 86% year over year, but that advertising revenue, up over 100% year over year. We're really seeing that monetization through advertising channels really take off for Zynga, really flexing the muscle.
By acquiring Chartboost, they're going to be able to grow those profit margins a little bit more, they're going to have more insights as a company and how they're doing, the advertising, and who their users are. And Chartboost, they have more companies that they service than just Zynga. They're connected to many mobile gaming companies. Now Zynga is connected to many mobile gaming companies.
It only trades for 18 times forward earnings, that's incredible value stock in today's market. With this growing advertising business, I really think that it's a good long term value play right now.
