What Factors Will Drive Growth For Zynga’a Advertising Business?
Zynga’s (NASDAQ:ZNGA) Advertising segment accounts for more than 15% of the company’s value, according to our estimates. Besides virtual goods and paid downloads, Zynga also makes money through advertising services by helping marketers reach and engage with their audience in a targeted manner. The segment revenues have grown from $114 million in 2013 to $196 million in 2017. This can be attributed to higher licensing revenues, and engagement ads. However, we expect the revenues to grow in low single digits in the coming years, partly aided by the Gram Games acquisition and launch of new games. We have created an interactive dashboard ~ A Look At Zynga’s Advertising Business. You can adjust revenue and margin drivers for 2018 and 2019 to see how it impacts the company’s overall revenues, earnings, and price estimate. Below we discuss our expectations and forecasts for the segment.
Advertising Revenues Will Likely See Modest Growth In The Near Term
Zynga’s advertising revenues will likely grow in the coming years led by new game launches. Some of the recent game launches, such as New Words With Friends 2 and CSR Racing 2, are likely to continue to gain traction. Additionally, mobile usage has outpaced desktop usage for Zynga and this trend is expected to continue in the future. The company’s mobile audience grew 24% (y-o-y) to 23 million in Q1 2018. Zynga’s key gaming franchises, including Zynga Poker, CSR 2, FarmVille 2, Hit It Rich! Slots, and Wizard of Oz Slots continue to do well. These games account for more than half of the company’s revenues and management plans to continue investing in them. In addition, Zynga acquired Grant Games for $250 million last month, and it will further aid the advertising growth. The company’s popular titles includes, Merge Dragons! and 1010!. Grant Games’ titles are expected to add 3 million active users for Zynga. Having said that, we don’t expect any significant jump in advertising revenues in the coming years, given the stiff competition in the gaming market. 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 and Electronic Arts. Zynga’s performance on mobile is far behind that of its competitor Activision Blizzard’s King Digital, which has seen massive success from its Candy Crush franchise. Almost 70% of the bookings that King Digital generates through this game come from its mobile platform. An increase in competition among social game developers could impact Zynga’s advertising revenues.
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