Zynga’s Mobile Growth Support $14 Stock But Watch Rising Costs
Zynga (NASDAQ:ZNGA) reported its Q1 2012 earnings with revenue of $321 million, up 32% year-over-year. It continued to add new active users by launching new games like Hidden Chronicles, Slingo and Scramble with Friends last quarter, and also made some high profile acquisitions like OMGPOP, the maker of Draw Something. Its monthly active user base expanded to 292 million in Q1 2012, up 24% year-over-year, after seeing a decline in the second half of 2011. [1] However, it posted a net loss of $85 million, primarily due to a massive jump in its R&D expenses, which means that it has reached the point where it has to spend increasing amounts of money to develop new games to retain its existing users and attract new ones.
Zynga competes primarily with Electronic Arts (NASDAQ:EA), Playdom which was recently acquired by Disney (NYSE:DIS) and other independent social gaming studios.
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Mobile to drive growth for Zynga
Zynga launched four new mobile games in the last quarter and also acquired Draw Something, which was one of the most popular game of 2012. The majority of its bookings & revenue growth came from mobile. We expect it to continue to focus on the mobile gaming space, and derive most of its user/revenue growth from mobile games going forward.
Zynga Platform and Online Gambling could take Zynga to the next level
Until now, Zynga has been dependent primarily on virtual goods transactions and advertising for almost all of its revenue. Zynga launched its own cloud infrastructure – Zynga Platform – in March 2011. It will offer a complete gaming infrastructure to other game developers, and enable them to leverage its massive reach and cloud platform to run its games and market them to its existing audience, charging a percentage cut of its revenues in return. This could generate sizable revenues for Zynga going forward.
Another interesting space Zynga is looking at is the online gambling space. It is apparently in talks with Wynn and may launch online, real-money gambling games in 2012. Since the average player spend in online games is much higher than in social games, this could significantly boost Zynga’s revenues in the coming years, if Zynga plays its cards right (no pun intended).
We currently have a $14 Trefis price estimate for Zynga, which stands nearly 45% above its market price. New games account for almost 50% of Zynga’s total value.
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