Should You Buy, Sell Or Hold Zynga Stock At $8?

by Trefis Team
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Despite a 30% rise since the March lows, at the current price of around $8 per share we believe Zynga stock (NASDAQ: ZNGA), a fast growing mobile gaming company, has more room for growth in the near term. ZNGA stock has rallied from $6 to $8 off the recent bottom compared to the S&P which moved 60% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. Though gains have been lower since March, Zynga is actually up 32% since the start of the year, compared to just 9% growth for the S&P 500. ZNGA stock is also up 2x from levels seen in early 2018, over two years ago.

Some of the 2x rise of the last 2 years is justified by the 53% growth seen in Zynga revenues from 2017 to 2019, while its revenue per share (RPS) grew 42% to $1.41 in 2019, compared to $0.99 in 2017. This can be attributed to a 8% uptick in total shares outstanding. Along with the growth in RPS, the company’s P/S Multiple also expanded. We believe the stock is likely to see upside despite the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 98% Change in Zynga Stock between 2017 and now?‘, has the underlying numbers.

Zynga’s P/S multiple changed from 4.0x in 2017 to 4.3x in 2019. While the company’s P/S is 5.6x now, there is a potential upside given the expected growth in RPS over the coming years, as we discuss below.

So what’s the likely trigger and timing for upside?

The global spread of Coronavirus has resulted in an increase in the demand for gaming, given that more people are confined to their homes, eschewing more public forms of entertainment. This has reflected in Zynga’s performance thus far in 2020, with sales growing a solid 48% to $1.4 billion for the nine month period ending September 2020. The company’s RPS now stands at $1.36 compared to $0.98 in the prior year period. Specifically, the company benefited from a successful launch of its new game – Harry Potter: Puzzles & Spells in Q3, while some other franchises, such as Hit It Rich! Slots, and Game of Thrones Slots Casino marked record bookings during Q3.

Zynga’s strong growth over the recent years can be attributed to its acquisitions of gaming portfolios including that of Small Giant Games, Gram Games, Peak Games, and Rollic recently. This has led to a sharp jump in its Average Booking Per Daily Active User  from $0.11 in 2017 to $0.19 in 2019, and $0.23 as of Q3 2020. This trend is likely to continue over the coming years with higher in-game offerings.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of around $8, ZNGA stock is trading at 3.5x its 2021 expected RPS of $2.35. This compares with P/S of 4.3x seen as recently as late 2019, making the stock appear attractive for upside potential.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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