Should You Buy Zynga Stock For Over 40% Gains?

by Trefis Team
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Zynga’s stock (NASDAQ: ZNGA) gained over 56% – increasing from $6 at the beginning of 2020 to around $10 now, significantly outperforming the S&P500, which grew 19%. Why? 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. Additionally, Zynga over the recent years has been able to successfully expand on the acquired games, including that of Peak, Small Giant Games, and Gram Games. Earlier this year the company announced the acquisition of Rollic’s hyper-casual games portfolio, which will aid the company’s top line growth going forward. More importantly, the company’s recently announced acquisition of Echtra could potentially turn out to be a key growth driver over the coming years. We discuss more in the sections below.

But is this all there is to the story?

No, not quite. Despite the recent rally, Trefis estimates Zynga’s Valuation at about $14 per share, over 40% above the current market price based on two key opportunities.

The first opportunity we see is to Zynga’s Revenue growth over the coming years. 2020 was a great year for Zynga’s top line expansion (49% y-o-y growth), and the momentum will likely continue in 2021 as well. This is not only due to the impact of Covid-19, but also due to the company’s recently acquired gaming portfolios, resulting in an overall rise in user engagement for Zynga’s games. The company reported Daily Active Users of 27 million in 2020, reflecting a large 80% growth over the 15 million figure seen in 2016. Not only did the company expand its user base, but also saw 2x expansion of Average Booking Per User (ABPU) from $0.11 in 2016 to $0.22 in 2020. This trend is likely to continue for Zynga going forward, as it successfully expands its gaming portfolio. Furthermore, Zynga, which earns most of its revenue from the Mobile platform, has recently acquired Echtra, which specializes in cross-platform games. For instance, Activision Blizzard’s Call of Duty can be played in a multiplayer mode with players on different consoles or devices. This will open up immense opportunity for Zynga to work on its cross-platform games in the pipeline.

The second key opportunity stems from Zynga’s valuation multiple compared to its peers. The stock now trades at 24x its projected 2021 adjusted earnings per share of about $0.40, per Trefis estimates. This is largely in-line with its peers, Electronic Arts and Activision Blizzard, trading at 23x and 25x forward earnings, respectively. However, we believe that Zynga deserves a premium in multiple over some of its peers given the strong revenue growth it has posted over the past years, and a trend that is expected to continue going forward. For perspective, Zynga’s revenues grew a large 129% between 2017 and 2020, compared to under 15% growth for Electronic Arts and Activision Blizzard over the same period. While we acknowledge that Zynga’s revenue base of around $2 billion is much smaller compared to $5.5 billion for Electronic Arts and $8.1 billion for Activision Blizzard, still the growth Zynga has posted is meaningful. Now, even if we were to look forward, Zynga’s revenues are expected to grow 38% over the next two years, compared to 15% growth for Activision Blizzard, and 24% growth for Electronic Arts.

To further strengthen our argument on Zynga’s multiple, let us look at the bottom line expansion. Zynga’s adjusted earnings have grown 300% between 2017 and 2020, and this compares with 45% growth for Activision Blizzard and 15% growth for Electronic Arts. Looking forward, Zynga’s adjusted earnings are expected to grow 37% over the next two years, compared to 23% and 27% growth expected for Activision Blizzard and Electronic Arts, respectively. As such, we believe Zynga deserves to trade at a premium over its peers, and we believe a P/E multiple close to 35x will be appropriate for ZNGA stock. Our price estimate of $14 for Zynga stems from a 35x P/E multiple and $0.40 in adjusted earnings per share in 2021. This implies over 40% premium to the current market price of $10.

Looking at the broader economy, any further recovery and its timing hinge on the broader 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.

While ZNGA stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Kulicke and Soffa Industries vs Activision Blizzard.

See all Trefis Price Estimates and Download Trefis Data here

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