The Key Scenarios For Zynga’s Stock
Early last month, Zynga (NASDAQ:ZNGA) reported ints most recent quarterly results. Though it outperformed during the third quarter earnings results on bookings and profitability, its near-term outlook looked weak, due both to the declining popularity of older games, and to the delayed launch of certain new games. While our $2.64 price estimate for Zynga’s stock is at par with the current market price, we believe there is considerable uncertainty surrounding the company’s future outlook, as it is difficult to predict the success of new games. In this article, we highlight certain key scenarios related to recovery in player base and bottom-line results, that could influence its stock significantly over the coming years, for better or worse.
See our complete analysis for Zynga
New Games Lead To A Greater-Than-Expected Increase In User Base (+20%)
Zynga’s average monthly active user (MAU) base plummeted from 302 million in 2012 to 118 million in 2014, due to reduced popularity of PC games and problems with its Facebook-based franchise. The same factors also caused average MAU to fall to 75 million in Q3 2015 from 103 million in a similar period a year ago. However, we anticipate the social gaming company will partly recover in the future, owing to success on the mobile platform and the planned launch of certain new games. Significant cash reserves and technical strength, along with access to proprietary tools and technology, will help Zynga in the future. As a result, we forecast Zynga’s average MAU (excluding Poker) to stabilize and rise to 80 million by the end of our forecast horizon. This is as we believe the company’s new game launches in gaming categories (including Action-strategy, Social Casino and Racing) should gain some traction in the mobile gaming market. The launches of Dawn of Titans and CSR2 in 2016 are likley to lift Zynga’s prospects, in our view.
In the event, Zynga’s average monthly active user base (excluding Poker) recovers more substantially to 120 million by the end of our review period, then this scenario will take our price estimate 20% higher to $3.20. We believe this scenario is plausible, if: 1) Zynga’s new games gain more-than-expected success in the market; 2) Zynga’s existing game portfolio continues to stay popular in the market; and, 3) innovation and access to new technologies (either through in-house development or acquisitions) help Zynga bring leading games to the market. We’d continue to closely track the the performance of new games launched by Zynga, as their success could potentially change the fortunes for the gaming company.
Continued Challenges Lead To Less-Than-Anticipated Improvement In Profitability (-15%)
Zynga’s EBITDA margin (in Trefis adjusted terms) fell significantly from 26% in 2012 to 18% in 2013 and to -5% in 2014, as its business model came under various challenges. However, in our present valuation model, we estimate this metric will recover back to 25% over the long-run, as we expect new games to drive top-line growth and hence operating leverage gain in the future.
On the other hand, if Zynga’s adjusted EBITDA margin rises to only 18% by the end of our review period, then this scenario will lower our price estimate by 15% to $2.20. We believe this scenario is possible if Zynga is unable to launch new hit games in the market. The rapid pace of changes in the mobile gaming market, driven by rising competition, could weaken Zynga’s chances of success. Any failure to grow top-line, will further put pressure on product development and marketing expenses to launch new hit games, resulting in less-than-expected improvement in margins.
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