Buy, Sell, Or Hold Zynga At $8?

Zynga (NASDAQ:ZNGA) stock grew 26.5% from $6 in the beginning of this year to $8 as of April 27, compared to over a 10% decline for the broader S&P 500. Despite Zynga’s outperformance compared to the broader markets, we believe there is still an upside potential from the current levels. Why is that? Zynga, along with other gaming companies, could see higher sales, given that more people are confined to their homes, and the average time spent on gaming is on the rise over the recent months. Also, Zynga’s stock has been on a strong run, with 53% growth between 2017 and 2019, as compared to around 20% growth for the S&P 500. Our dashboard, ‘What Factors Drove 93.5% Change In Zynga’s Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Zynga’s stock price growth of 53% between 2017-19 can be attributed to its stellar revenue and earnings growth. The company’s revenues were up 53.4% from 2017 to 2019, partly driven by the company’s acquisitions of gaming portfolios of Gram Games and Small Giant Games. Adjusted net income margin, which is calculated using the company’s reported Non-GAAP Net Income, grew 93% from 13.1% in 2017 to 25.3% in 2019. There was a slight increase in the number of shares outstanding over the same period. Strong margin expansion and revenue growth, partly offset by the growth in number of shares, resulted in a whopping 173% jump in adjusted EPS (the company’s reported Non-GAAP EPS).

Zynga’s P/E multiple, though, declined from 31.7x in 2017 to 17.8x in 2019. While Zynga’s P/E is up to about 22.5x now, given the volatility of the current situation, there is an additional possible upside for the company’s multiple, when compared to levels seen in the past years – P/E of 31.7x at end of 2017, and 22.5x currently.

How Is Coronavirus Impacting Zynga’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity, and people are confined to their homes. This situation has so far been good for gaming companies, evident from the stock price movement vis-a-vis broader markets. In fact, there has been over a 70% surge in video game usage during peak hours, while gaming spend grew 34% y-o-y on software. While this trend is favorable for most of the gaming companies, Zynga in particular is an important stock to watch out for, given its primary focus on mobile gaming.

Mobile gaming has seen strong growth over the recent years, and it accounted for 45% of total gaming revenues by platform in 2019. Looking forward, it is estimated to grow 40% from $68.5 billion in 2019 to $95.4 billion in 2022, likely accounting for 50% of the total gaming market. Within mobile gaming, the user engagement for Zynga’s games have risen in the recent past. Zynga’s popular games include, Merge Dragons!, Zynga Poker, CSR 2, Words With Friends, Empires & Puzzles, and Wizard of Oz Slots, among others. Zynga’s Daily Active Users grew slightly from 21.7 million in 2017 to 21.9 million in 2019, while its Average Booking Per Daily Active User grew sharply from $0.11 in 2017 to $0.19 in 2019, something we discuss in our Zynga Revenues dashboard. The company is expected to launch multiple new games in 2020. Last month, it released Harry Potter: Puzzles & Spells, and these new games will likely aid the top line growth.

Between January 31st and April 27th, Zynga stock is up 29%, vs. over a 10% decline in the S&P 500. A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Despite these concerns, the outperformance of gaming stocks such as Zynga is noteworthy. We believe Zynga’s Q1 results in May will confirm the trend in revenues.

Among other gaming companies, Activision Blizzard is also in a good spot led by its latest Call of Duty franchise.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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