Zynga Q4 Earnings Preview: Can Zynga Beat Consensus Earnings Estimate?

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Trefis
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Zynga

Zynga (NASDAQ: ZNGA) is slated to release its Q4 and full year 2019 results on February 5, 2020, and it will likely beat average consensus earnings estimates by $0.01, according to our estimates. For full year 2019, Trefis estimates that the company will report:

  • Gross revenues of $1.55 billion, reflecting 60% y-o-y growth, primarily driven by the company’s new titles and acquisitions. Our forecast is in line with the average consensus revenue estimate of $1.55 billion.
  • EPS figure will likely grow to $0.27 on an adjusted basis, primarily due to higher revenues, partly offset by higher expenses. Our EPS figure is marginally higher than the average consensus estimate of $0.26.

There could be a possible move in the stock price if the company beats the average consensus figures above. In fact, our forecast indicates that Zynga’s valuation is $7 a share, which is 20% above the current price of ~ $6. Our interactive dashboard analysis on Zynga’s Pre-Earnings has more details about our expectations, parts of which we highlight below.

(1) Gross Revenues Expected To Grow 60%

  • Trefis estimates Zynga’s 2019 revenues to be $1.55 billion, in line with the average consensus of $1.55 billion.
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Online Games                                       $973 Mil (63%)
+ Advertising & Other                        $319 Mil (20%)
____________________________________
= Net Revenue                                     $1.29 Bil
+ Change In Deferred Revenue       $263 Mil (17%)
————————————————————–
TOTAL                                                  $1.55 Bil
Consensus                                            $1.55 Bil
Surprise                                                $0.0 Bil

  • Looking at net revenues, they will likely surge to $1.3 billion in 2019.
  • Total net revenues have increased at an average annual rate of 6.2% from $765 million in 2015 to $907 million in 2018, primarily driven by the company’s online games. It is expected to see 42% growth in 2019, primarily led by its recent portfolio acquisitions from Gram Games and Small Giant Games.
  • See Zynga Revenues – How Does Zynga Make Money? We provide an interactive, in-depth view of the company’s revenues along with our forecasts.
  • Key for 2020: Zynga’s net revenue will likely grow at an average rate of 27% over 2019-2020, led by the company’s new games, and the impact of recent acquisitions.

(2) EPS Likely To Grow 12% From $0.24 In 2018 To $0.27 In 2019

  • Zynga’s full year 2019 adjusted earnings per share (EPS) is expected to be $0.27 per Trefis analysis, reflecting 12% y-o-y growth. This is slightly higher than the average consensus estimate of $0.26.

Net Revenues           $1.29 Bil
– Total Expenses      $1.03 Bil
————————————————-
= Net Income           $0.26 Bil
÷ No. of Shares        942 Mil
————————————————-
EPS                             $0.27
Consensus                $0.26
Surprise                    $0.01

  • A growth in revenues, partly offset by growth in expenses and increase in total shares, will largely impact EPS growth.
  • As we forecast Zynga’s net revenues to grow 42%, and expenses to grow at 48%, this will result in a 330 bps decline in the company’s adjusted net income margin figure from 23.2% in 2018 to 19.9% in 2019, as detailed in Zynga’s pre-earnings dashboard.
  • See Zynga Expenses – How Does Zynga Spend Its Money? We provide an interactive, in-depth view of the company’s expenses, and earnings margins
  • Key for 2020: We believe that revenue will grow in mid-twenties percent on average, while expenses could grow at a slightly faster pace, resulting in the net income margin figure to decline to 23.2% fin 2018 to 21.2% in 2020. We currently forecast Zynga’s 2020 EPS to be $0.32 on an adjusted basis.

(3) Stock Price Estimate ~ 20% Higher Than Market Price

  • Trefis forecast for Zynga’s full year 2019 earnings of $0.27 and P/E multiple of 26.6x works out to a fair value of $7 for Zynga’ stock, which is roughly 20% higher than the current market price of around $6, implying a 23.4x multiple and average consensus eps of $0.26.
  • A trailing P/E multiple of 26.6x looks appropriate for Zynga’s stock, which is higher than the current implied P/E multiple of 23.4x.
  • We use our full discounted cash flow model for Zynga to arrive at a P/E multiple of 26.6x for a price estimate of $7.
  • Zynga’s current P/E ratio is lower than that of Electronic Arts and Activision Blizzard’s as shown in the charts below.
  • Note: P/E Multiples are based on Share Price at the end of the year, and reported (or expected) Adjusted Earnings for the full year.

See all Trefis Price Estimates and Download Trefis Data here

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