A Look At Our $4 Valuation For Zynga

by Trefis Team
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Zynga (NASDAQ:ZNGA) has seen steady revenue growth in recent years, primarily led by its Online Games segment, which continues to benefit from its games, including Zynga Poker, and CSR Racing 2. Both these games combined accounted for over 35% of the company’s revenues. Zynga is now focused on launching new games, and to have franchises that could run for a longer time, such as its competitor King’s Candy Crush franchise. The company plans to release new games in the second half of this year and early 2019, which will aid the company’s top line growth. We have also created an interactive dashboard analysis which you can use to arrive at your own price estimate for the company by modifying the various drivers.

Existing And New Games Will Likely Lead Zynga’s Growth

Zynga’s online games, which includes Poker, CSR, and FarmVille among others, accounts for roughly 75% of the company’s revenues, and we estimate them to grow 8% in 2018. The revenues are dependent on the number of average monthly active users for Zynga’s online games. This number was on a decline over the past couple few years. However, this trend reversed in 2017, and the company saw a 25% growth in active users to 80 million. This can be attributed to its games, including CSR Racing 2. Existing franchises including Zynga Poker, Farmville and Wizard of Oz Slots are doing well, and Zynga plans to focus on enhancing its successful franchises. In addition, Zynga’s mobile business is showing a promising trend, with a 10% growth in mobile bookings in Q1 2018. The company is also benefiting from its new releases, such as Words With Friends 2, and it plans to release more games in the coming quarters, which should aid the company’s overall growth. However, the social gaming market is becoming competitive, as the cost of developing games is low. Zynga will continue to face competition from other Internet and gaming giants such as Activision Blizzard’s King, EA Games, and Disney (Playdom), who are making inroads in this space. Zynga’s performance on mobile is far behind that of its competitor King. Candy Crush is one of the most popular mobile games with close to 300 million monthly active users. Almost 70% of the bookings that King generates through this game comes from the mobile platform. Zynga’s management in its recent quarterly conference call stated that it is focused on creating more forever franchises. Looking at the Advertising segment, we don’t expect much growth, given the stiff competition in the sector.

Our $4 price estimate for Zynga is based on $0.11 expected EPS in 2018 and a price to earnings multiple of a little under 38, which is slightly below most of the estimates for the overall industry. Our revenue forecast of $919 million represents year-on-year growth of around 8%. Of the total expected revenues in 2018, we estimate $719 million in the Online Games segment, and Advertising making up for the rest. Our price estimate of $4 for Zynga is at around an 8% premium to the current market price.

 

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