Is Zynga Stock A Buy Ahead Of Q4 Results?

by Trefis Team
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[Updated 2/9/2021] Zynga Pre-Earnings Update

Zynga stock (NASDAQ: ZNGA) will be in focus this week, as it will announce its Q4 results on Wednesday, February 10. We expect Zynga to report solid results with revenues estimated to be $680 Mil, in-line with the $678 Mil consensus estimates, with the adjusted earnings to be $0.10 per share, a cent higher than the $0.09 consensus estimate. Zynga is expected to benefit from an increased user base due to higher demand for gaming with people spending more time at home due to the pandemic. In addition, the company’s recent acquisition of Rollic’s hyper-casual games portfolio will aid the company’s top line growth.

Overall, while growth is likely to remain strong, we continue to believe that the stock has more upside potential. ZNGA stock has already rallied 9% over the last 5 trading days, as it nears its Q4 earnings announcement, and our forecast indicates that Zynga’s valuation is around $12 per share, which is 6% above the current market price of around $11. At the current price of $11, ZNGA stock is trading at 26x estimated 2021 earnings of $0.45, which is in line with 26x for Electronic Arts and lower than 28x for Activision Blizzard. Additionally, ZNGA stock has momentum on its side, and if the company is able to deliver an earnings beat, it’s likely that its stock could rally further. Our interactive dashboard analysis on Zynga’s Pre-Earnings has additional details.

[Updated 12/16/2020] Buy Or Sell Zynga Stock

Zynga stock (NASDAQ: ZNGA) is up 48% since the start of the year and it has gained around 46% from its March lows. We believe that Zynga could offer an upside in the near term, as the company’s revenues in the last three quarters have actually grown by a solid 48%, as it benefited from movement restrictions in the pandemic, and people spent more time on gaming.  Zynga was on a solid run with its sales growing 53% between 2017 and 2019, led by an increasing user base and the impact of acquisitions, including games from Peak Games, Gram Games, and Small Giant Games. This trend is likely to continue going forward and bolster the earnings growth rate of the company in the near term – leading to stock price growth.

ZNGA stock has rallied from $6 to $9 off the recent bottom compared to the S&P which moved 65% over the same time period. Zynga’s stock price growth was also supported by a solid Q2 beat, though guidance of 41% y-o-y revenue growth for Q4 was lower than most of the estimates. Looking at a wider time horizon, ZNGA stock is up 128% from levels seen in early 2018, over two years ago. Despite the recent rally, we feel that the company’s stock has more room for growth, as it has benefited from the Covid-19 lockdowns, and its valuation implies it has further to go. Our dashboard ‘Buy Or Sell Zynga Stock provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last two years or so is justified by the roughly 53% growth seen in Zynga’s revenues from $0.9 billion in 2017 to $1.3 billion in 2019, and the figure is $1.8 billion for the last 4 quarters. This clubbed with Net Margin expansion of 93% from 13% to 25% on an adjusted basis meant that earnings grew a solid 3x. On a per share basis, adjusted earnings were up 174% from $0.13 to $0.34, due to a 9% growth in total shares outstanding amid share issuances. The growth in margins can partly be attributed to a higher change in deferred revenue and lower taxes among other factors.

Finally, Zynga’s P/E ratio based on trailing adjusted earnings contracted in 2019. It declined from 32x in 2017 to 18x in 2019. While the company’s P/E has now increased to 26x trailing earnings, it could see further expansion given that the earnings will likely see a strong growth in 2021 and beyond, as we discuss in the section below.

How Is Coronavirus Impacting ZNGA Stock?

The global spread of Coronavirus has meant an increase in the demand for gaming, given that more people are confined to their homes, eschewing more public forms of entertainment. That said, Zynga has posted strong sales growth over the recent years partly aided by acquisitions, which led to an expansion of its user base from 53 million MAUs (monthly active users) in 2016 to 69 million in 2019, and 83 million by the end of Q3 2020. Not only has the company has managed to grow its user base, but also the ABPU (average booking per user) from $0.107 in 2016 to $0.196 in 2019, and $0.213 as of Q3 2020. Zynga, in-line with other gaming companies, is seeing an increased demand for in-game offerings, which has aided its revenue growth. This trend is likely to continue in the near term, and help Zynga’s stock price growth post the pandemic.

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 near $9, ZNGA stock is trading at just 20x its 2021 estimated adjusted earnings of $0.45. While the 20x multiple is higher than the levels of 17x and 18x seen in 2017 and 2018 respectively, it is much lower than the levels of 25x for Activision Blizzard and 24x for Electronic Arts, implying there is room for multiple expansion and stock price growth for Zynga.

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