Here Is What Can Trigger Zynga’s Stock Amid Growing Mobile Gaming Market

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Social gaming company Zynga‘s (NASDAQ:ZNGA) stock price has plummeted significantly since its IPO, owing to several challenges in its business model. The disruption in its Facebook and web gaming business has also contributed to its decline over the past few years. Zynga is now focusing on a mobile platform to develop new games and to enhance its outlook in the coming years. While the growth outlook in the global mobile gaming market looks positive, with expectations of over-15% annual growth in the industry, rising competition represents a threat that could play a spoilsport for Zynga. Against this backdrop, we believe a range of outcomes are possible, that could cause a significant movement in the company’s stock price. Specifically, we think the possibility of several successful game launches and faster-than-expected growth in expenses (due to increase in user acquisition costs with rising competition) could cause stocks price changes for better or worse.

See our complete analysis for Zynga

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Mobile Gaming Market Could Reach $45 Billion by 2018

The total revenue in the global mobile gaming market is estimated to surge at a CAGR of over 15% from $29 billion in 2015 to $45 billion in 2018, according to Digi-Capital (a market intelligence firm). At the same time, the overall revenue from all gaming software (across different platforms) is expected to grow at 8% annually from $88 billion to over-$110 billion by 2018. [1] Mobile games could overtake traditional console games as the leading game segment (in terms of revenues) in 2015. [2]

The high growth is expected to come from both developed as well as developing economies. In addition, the expansion is expected to be both ‘organic’ (as the mobile platform will attract new users to gaming), as well as ‘cannibalistic’ (by disrupting revenue growth on other gaming platforms). Asia Pacific accounted for the maximum share (54%) of the global mobile games market (estimated) in 2014, followed by North America (24%), Western Europe (15%), Eastern Europe (3%), Middle East and Africa (2%) and Latin America (2%). This is as per data by NewZoo (a games market research company) and AppLift (a company providing ad-tech services). [3]

How Does This Impact Zynga?

Zynga aims to leverage this strong demand by focusing on the mobile platform and on key gaming categories, including Action Strategy, Invest & Express, Social Casino, Racing, and Casual. Recently, the company exited the Sports category and reduced its focus on Runners category. The company is expected to roll out six to eight titles this year, including Dawn of TitansCSR2 and Farmville Harvest Swap.

With Zynga closing down its local Chinese operations at the end of last year, we think a large part of its outlook could be tied to future growth in the North American and European markets. Though China accounts for the highest share within the global mobile gaming market (around 20% estimated in 2015), we expect Zynga to make limited inroads within this region. [4]

And while the overall top-line outlook in the global mobile gaming market looks favourable for Zynga, we believe there are other things as well to bear in mind for the company’s investors. The competition in the mobile gaming market seems to be intensifying from both large and small-sized companies. This is due to the low barriers to entry in the mobile gaming industry. As a result, this is pushing up both developmental as well as marketing costs, due to the growing requirement for high-quality games, as well as increasing costs of user acquisition. Hence, Zynga will have to grow its top-line much faster than its expenses to improve its low-margins in the future. In our current valuation model, we have forecast Zynga’s revenue to rise at 7% annually till 2021, and its EBITDA margin to increase to over 30% by the end of our forecast horizon. In the event, Zynga’s expenses grow at a much faster rate than expected, and its EBITDA margin increases to only 20% by the end of our review period, then this scenario  results in a roughly 20% decrease in our price estimate for the company’s stock. On the other hand, if Zynga’s revenue increases at a 10% CAGR over our forecast period on the back of successful game launches (assuming constant margin estimates), then it results in a more than 20% rise in our price estimate. We believe this large level of uncertainty pertaining to gaming revenues has also played into the company’s stock price movement in the recent past.

Our $3.04 price estimate for Zynga, represents near-10% premium to the current market price.

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Notes:
  1. Mobile gaming will be a $45B market by 2018, leaving console gaming way behind, VentureBeat, May 4, 2015 []
  2. Global Mobile Games Revenues to Reach $25 Billion in 2014, Newzoo, October 29, 2014 []
  3. The Mobile Games Market to Reach $40.8 Billion by 2017, AppLift, October 27, 2014 []
  4. Gaming developers face an uphill battle in China, the #1 mobile gaming market globally, Business Insider, July 21, 2015 []