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Why Zynga Shares Zoomed Again

By Brian D. Pacampara, CFA – Feb 4, 2014 at 2:14PM

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Is this meaningful or just another movement?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Zynga (ZNGA) popped 10% today after UBS upgraded the online social games company from neutral to buy.

So what: Along with the upgrade, analyst Eric Sheridan boosted his price target to $6 (from $4), representing about 34% worth of upside to yesterday's close. While contrarians might be turned off by Zynga's massive earnings-related pop last week, Sheridan thinks there's more room to run given the strong growth and margin enhancement tailwinds continuing to work in its favor.

Now what: According to UBS, Zynga is also a particularly timely opportunity.

"What leads us to upgrade now? 1) We believe that Q1 '14 & FY '14 guidance from the recent earnings call will turn out to be conservative due to stability at the core Zynga properties (monetization/usage); 2) NaturalMotion (while inorganic growth) is one of the leading iOS game developers & has seen tremendous success with its CSR Racing and Clumsy Ninja franchises ... and 3) Zynga EBITDA margins (& FCF generation) is likely to materially improve from trough levels (effect of 18 months of core cost cutting & the leverage from NaturalMotion bookings growth) as EBITDA margins return to the 20%+ level in 2015 and beyond," noted Sheridan.

With the stock now up about 100% from it 52-week lows and trading at a price-to-sales of four, however, I'd wait for a much wider margin of safety before betting on Zynga's still-uncertain growth prospects.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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