Shares of mobile-gaming company Zynga (ZNGA) fell 35.2% in 2021, according to data provided by S&P Global Market Intelligence. This lost to the S&P 500's 27% return by a wide margin. For perspective, Zynga was a market-beating investment in 2020, up 61%.
But 2021's underperformance has caused Zynga stock to fall to levels not seen since May 2019. Because of this, its cumulative three-year returns are now losing to the market. Here's how we got here and why Take-Two Interactive (TTWO 0.55%) suddenly announced it's buying Zynga for $12.7 billion.
Zynga publishes games played on mobile devices. And for much of 2021, the stock performed well. The market loved it when the company reported full-year results for 2020 in February, showing that it set records for both revenue and bookings. And the records continued when first-quarter results were reported in May. For the first quarter, it generated revenue of $680 million and had bookings of $720 million, representing year-over-year growth of 68% and 69%, respectively.
But the market began souring on Zynga stock around the time of its second-quarter earnings report in August. While second-quarter revenue was up 59% year over year, this was slower than the previous quarter. Moreover, bookings dropped quarter over quarter. And because bookings represent future spending power among Zynga's users, investors didn't like this.
In addition to slowing growth, Zynga went on a mini acquisition spree around this time. For example, it announced the $525 million acquisition of StarLark in August, bringing its hit franchise Golf Rival to Zynga's portfolio. Another acquisition was that of Chartboost, which it bought for $250 million. This deal was announced in May but the closing was announced in August.
Zynga's slowing growth and spending spree seem to have turned off investors. But video game company Take-Two is taking this as an opportunity.
On Jan. 10, Zynga announced it's being acquired by Take-Two for $9.86 per share in a cash and stock deal, valuing the company at $12.7 billion. Why would Take-Two want a mobile game company with slowing growth? There are several reasons.
For starters, consider that the mobile-game market is the only part of the video game industry that's actually growing. According to third-party research company Newzoo, the global video game industry was expected to contract 1% in 2021. However, tablet games and smartphone games were both expected to grow. This mobile segment is Zynga's sweet spot and an area of need for Take-Two.
Secondly, although Zynga's growth is slowing, the company is still quite strong. As of the third quarter, it had 183 million monthly active users, up a whopping 120% year over year. And its international segment made up 40% of total revenue in the third quarter, growing 46% from the previous year. So Take-Two is acquiring a huge audience with global reach.
Lastly, Chartboost (the company Zynga acquired) is a mobile advertising platform with a lot of app data of its own. If Take-Two is looking to take advantage of the industry growth that mobile gaming provides, it makes sense to acquire a company like Zynga that is a publisher with ad-tech capabilities. In my opinion, Take-Two is making a good move.