- Online Games constitute 80% of the Trefis price estimate for Zynga's stock.
- Advertising constitutes 20% of the Trefis price estimate for Zynga's stock.
WHAT HAS CHANGED?
- Take-Two Interactive To Acquire Zynga
Take-Two Interactive has announced its plan to acquire Zynga in a deal valued at $12.7 billion. Zynga shareholders will get $9.86 per share, including $3.50 in cash and $6.36 of Take-Two stock. This transaction reflected a massive 64% premium to Zynga’s then value of $6 per share (as of Jan 7, 2022). We have long maintained our view that ZNGA stock is undervalued, given its decline of over 37% over the last year, compared to a large 23% rise for the broader S&P500.
Declining user engagement levels compared to the pandemic, and changes to Apple’s ad tracking policy are some of the reasons why ZNGA stock was being weighed down over the recent quarters. Zynga over the recent years has made multiple acquisitions and improved its revenue growth, a trend which is expected to continue going forward, as well.
- Coronavirus Impact On Zynga's Stock
Zynga’s stock has significantly outperformed the broader indices during the pandemic. The stock rallied roughly 2x from around $6 levels in early January 2020 to around $11 in May 2021. This compared with just 30% gains for S&P 500 index. However, since then the stock was on a downtrend, falling to levels of around $6 as of early January 2022. ZNGA stock rallied to levels past $9 after the reports of Take-Two Interactive's plans to acquire Zynga.
Zynga, along with other gaming companies, has benefited in the Covid-19 crisis, as the demand for gaming has gained traction, given that more people were confined to their homes, eschewing more public forms of entertainment.
Even before the crisis, Zynga was on a strong run, with its stock up roughly 60% in 2019, led by increased demand for its games, and the success of recently acquired games, including, Merge Dragons!.
However, in early Aug 2021, gaming stocks saw declines, due to y-o-y decline in user-engagement levels. As economies are opening up with a rise in vaccination rates, people have started venturing out, resulting in less amount of time spent on gaming. In fact, ZNGA stock plunged 18% in a single trading session on Aug 8, 2021, following its Q2 results and a downward revision to its full-year revenue outlook. In November, the company reported Q3 results and raised its full-year outlook but it didn't help the stock price growth.
- Q1 2022 Performance
Zynga reported Q1 results, with earnings of $0.07 on a per share and adjusted basis falling below the $0.09 consensus estimate. Similarly, net bookings of $695 million fell short of the $741 million consensus estimate. The company’s management did not provide a full-year outlook, given the pending transaction of Take-Two Interactive’s acquisition of Zynga.
The company recently announced that its President of publishing business – Bernard Kim – is leaving to become CEO of Match Group. Downbeat results combined with changes in the management led to a decline in ZNGA stock over the past few days. A sell-off in broader markets owing to the rising interest rates and high inflation didn’t help ZNGA stock, either.
- Chartboost Acquisition
In early May 2021, Zynga announced the acquisition of Chartboost for $250 million. What makes this deal different is that Chartboost is not a gaming company. It is involved into mobile game marketing, advertising, and monetization. Founded in 2011, Chartboost is an advertising platform that reaches more than 700 million monthly users and 90 billion monthly advertising auctions. Zynga's advertising business is likely to benefit from this acquisition.
- Zynga's Foray Into New Categories
Zynga has entered into different gaming categories, such as Action Strategy, and this has helped the company's revenue growth. Looking forward, this could lift its monetization in the coming years.
- New Game Launches
Zynga is focused on creating new games and forever franchises, that can aid growth in the long run. It plans to launch new games in Action Strategy, Casual, Invest Express, and Social Casino categories.
- Mobile Expansion
While Zynga's traditional web business has been facing headwinds of late, its mobile business is showing promising results. Mobile bookings are seeing double-digit growth. This ongoing shift towards mobile is expected to aid its growth.
Zynga acquired the board and card games portfolio of Peak Games in November 2017. The company acquired certain games from Gram Games in 2018. Also, in the same year, the company acquired Small Giant Games, which houses some of the popular gaming titles, including Empires & Puzzles, and Merge Dragons, along with its pipeline of games. In August 2020, the company announced the acquisition of Rollic games. In March 2021, Zynga acquired Echtra games, best known for its Torchlight title. These acquisitions have fueled growth for the company over the recent quarters, a trend expected to continue in the near term.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
- Revenue From Online Games: Zynga's online games, which includes, Poker, and CSR Racing among others, accounts for roughly 80% of the company's revenues. We estimate the revenues to increase from around $2.2 billion in 2021 to the north of $4 billion by the end of our forecast period. The revenues are dependent on the number of average monthly active users for Zynga's online games. This number has fluctuated over the past few years. However, Zynga's new games, such as Merge Dragons, and Empires & Puzzles are likely to attract users and compensate for the decline in the user base of its older games. Accordingly, we estimate an uptick in revenues.
However, if the revenues grow at a slower pace than expected, and stay around $3.5 billion by the end of our forecast period in 2028, it would translate into a 25% downside to our current price estimate. In case, Zynga posts better than expected revenue growth led by new games, and the revenues inches north of $6 billion by the end of our forecast period, it would translate into an upside of 25% to our current price estimate for Zynga.
- Revenue From Advertising: Zynga earns advertising revenues primarily through branded virtual goods and sponsorships integrated within the games. We estimate the advertising revenues to grow rapidly from around $551 million in 2021 to the north of $1 billion towards the end of our forecast period. However, if the advertising revenues face headwinds amid increased competition and the revenues grow at a slower than expected pace to $600 million, it would result in a 12% downside to our current price estimate. In case Zynga manages to post better than expected growth in advertising revenues led by the success of its new games, and the revenues inches towards $1.5 billion towards the end of our forecast period, it will result in an upside of 10% to our current price estimate for Zynga.
Social games are generally web-based games that use a variety of social platforms to enable gaming interaction. The features that make social gaming attractive include the ability to track how well an individual’s friends and other people within the community are doing, and the ability to have multiple players engaged at any point in time if needed. The social aspect of these games makes gaming more addictive and viral, thereby attracting more users.
Founded in 2007, Zynga creates free social games such as CSR Racing 2, FarmVille: Tropic Escape, Zynga Poker, and Words With Friends. The company provides its games for different platforms including Facebook, iPhone, and Android.
Millions of people log in to these platforms to play Zynga games, interact with their friends and buy in-game items and virtual goods.
SOURCES OF VALUE
Monthly Unique Users Showing Gradual Improvement
Zynga has around 184 million average monthly mobile active users (as of 2021). Zynga is currently focusing on new games such as Merge Dragons to interest its users, and success with these games could lead to higher user growth and user engagement going forward.
Zynga has become the web’s most dominant social gaming website. Some of its key competitive advantages are:
- Strong capital position
- Zynga currently has close to $1.0 billion in cash (as of Mar 2021), and $1.7 billion in debt.
- Marketing advantage
- Zynga’s huge gaming audience enables it to market new games to its existing users at low costs. New game developers often have marketing budgets of 50% of the cost of developing the game. However, the company has spent heavily on marketing to bring back users and increase engagement. These efforts are starting to bear fruit and aiding the booking per user metric.
Zynga's stock has outperformed the broader indices during the Covid-19 pandemic, given the kind of crisis the world is facing, with people confined to their homes. As such, demand for gaming increased. However, with the opening up of economies, the overall user-engagement levels are now seeing a slowdown, weighing on gaming stocks. Changes in Apple's ad tracking policy also led to a decline in gaming stocks.
New games and acquisitions to boost sales
Zynga will likely see strong revenue growth in the near term, led by the impact of the company’s recent acquisitions of Rollic games and Echtra Games, which houses some of the popular gaming titles, including Torchlight, along with its own pipeline of games.
Evergreen gaming categories will be targeted by Zynga for growth in the near term
Zynga currently has games in highly-popular gaming categories such as action-strategy, Social Casino and Racing. A number of new titles such as CSR Racing 2 and FarmVille: Tropic Escape have recently been launched.
Revenue concentration in games
Certain games such as Poker and CSR Racing 2 contribute to the bulk of the revenues for Zynga as they represent the majority of its total daily active users (DAU). The share of the two top games in the company's overall online gaming revenue has come down from 51% in 2014 to around 41% in 2020. High dependence on certain games can potentially be a risky strategy for social gaming companies, and therefore Zynga is trying to diversify its product portfolio.