Could Zynga Stock Double By 2023?

Zynga (NASDAQ:ZNGA), a fast growing gaming company with a market capitalization of $10 billion, has seen its stock rise by 50% this year. The stock now trades at over 4x projected 2020 revenues, despite the fact that the company will post a loss this year. Does this make the stock expensive? We don’t think so, considering that revenues could grow over 3x by 2023, along with expansion of Net Margins. We believe the stock could double to north of $18 levels over the next 3 years.  Here’s how this is possible.

For more details on Zynga’s historical performance, see our interactive dashboard what drove Zynga stock up 130% Since The End Of 2017

Zynga’s Revenues could grow by a little under 3x from $1.3 billion in 2019 to over $3.6 billion by 2023, representing a growth rate of roughly 29% per year (for context annual growth was about 24% between 2017 and 2019). There are multiple trends that support this continued growth. Firstly, Zynga over the recent years has acquired gaming portfolios of Small Giant Games, Gram Games, and Peak Games, and they have been doing well with increased sales. While Zynga’s Daily Active Users grew slightly from 21.7 million in 2017 to 21.9 million in 2019, its Average Booking Per Daily Active User grew sharply from $0.11 in 2017 to $0.19 in 2019. The company recently announced its plans to acquire Rollic, a mobile games developer with a portfolio of hyper-casual games, and it will further bolster the company’s sales growth. With the recent acquisitions of Peak and Rollic, the company’s daily active user base is expected to surge to 40 million, and it will likely expand over the coming years.

Also, gaming companies, such as Zynga, have benefited in the current crisis, as the demand for gaming has gained traction, given that more people are confined to their homes, eschewing more public forms of entertainment. We believe that a significant portion of newly acquired users will stick even after the crisis winds down.

While Zynga will post a loss of $550 million (on a GAAP basis as per the company’s guidance) this year due to a significant change in deferred revenues, it will likely post net positive adjusted earnings. Also, the company’s past investments in R&D and product development along with new acquisitions have start paying off. While other gaming companies, such as Activision Blizzard and Electronic Arts, posted margins of more than 25% over the last few years (Non-GAAP Net Income, or profits after all expenses and taxes, calculated as a percent of revenues), Zynga is a high growth company, and it could see gradual growth in margins. However, it’s probably reasonable to assume that as Zynga’s business gains scale, it can boost margins to about 25% in 2023. Considering our revenue projections of roughly $3.6 billion and 25% margins, $900 million in adjusted earnings is likely possible by 2023.

Now if Zynga’s Revenues grow 3x, the P/S multiple will shrink to 2.5x from its current level, assuming the stock price stays the same, correct? But that’s what Zynga’s investors are betting will not happen! If Revenues expand 3x over the next few years, instead of the P/S shrinking from around 6.5x presently to about 2.5x, a scenario where the P/S metric falls more modestly, perhaps to about 5x, looks more likely. For context, the more prominent companies, such as Activision Blizzard and Electronic Arts trade at over 6x. One might assume that Zynga will continue to trade slightly below these more profitable companies. This would make growth in Zynga’s stock price by about 100% a real possibility in the next three years, taking its market cap to around $20 billion. This would translate into a P/E multiple of about 20x based on our projected 2023 earnings for the company.