Here’s What Will Drive Zynga’s Near Term Revenue Growth
Zynga (NASDAQ:ZNGA) generates its revenues primarily from two sources: Online Games, which includes popular franchises, such as Zynga Poker, CSR, and FarmVille, among others; and Advertising. The company acquired board and card games portfolio of Peak Games in November 2017. Earlier this year, the company made another acquisition of Gram Games. These acquisitions will likely boost the company’s revenue growth in the near term. We have created an interactive dashboard ~ What Are Zynga’s Key Sources of Revenue. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate. Below we discuss both the segments in detail.
Expect Both Online Games And Advertising To See Low Double Digit Growth In The Near Term
Zynga’s Online Games accounted for 77% of the company’s total revenues in 2017. The segment revenues have fluctuated over the past few years, but saw strong 22% growth to $666 million in 2017. We forecast Zynga’s Online Games revenues to grow in low double digits to around $750 million in 2018, and north of $1 billion towards the end of our forecast period. This can be attributed to continued demand for its franchises, such as Zynga Poker, and CSR 2, which have been doing well, and accounts for a significant portion of the company’s revenues. Also, the recent acquisitions of Peak Games (board and card games), and Gram Games will likely boost the revenue growth. The assets acquired from Peak Games have a wide appeal for casual gamers. Gram Games is focused on hyper-Casual and Puzzle genres with popular games, such as 1010! Note that Zynga is seeing growth primarily on the mobile platform, and the same now accounts for around 90% of the company’s overall revenues. Mobile platform is crowded with several large and small players, such as Activision Blizzard’s King Digital, and Electronic Arts. The competition could cap Zynga’s revenue growth in the long run. Having said that, the company is also focused on developing new games, and plans to launch them in the coming quarters, and it should aid the overall top line growth in 2019 onward, subject to their appeal and reception.
Looking at Advertising revenue, it accounted for 23% of the company’s total revenues in 2017. The segment revenues have grown at an average annual rate of 15% over the last four years. They were also up 15% in H1 2018, and it will likely see double digit growth for the full year, as well. The growth in Advertising can be linked to the trends in the company’s Online Games segment. With the launch of new games, and continued growth in forever franchises, as well as now the impact from acquisitions, will bode well for the Advertising growth. We don’t expect any significant change in the company’s gross margins, and forecast it to remain at around the 70% mark, which Zynga has maintained over the last four years.
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