We believe that the stock price of mobile gaming company Zynga (NASDAQ: ZNGA) has more room for growth from its current levels of $11. ZNGA stock is up 55% from the levels of under $7 it was at in mid-February, 2020, before the pandemic led to a steep correction in the stock markets. This marks an outperformance compared to the broader markets with the S&P 500 rising 26% over the same period. The outperformance of ZNGA stock can primarily be attributed to higher demand for gaming, as people spent more time at home, eschewing other forms of public entertainment.
Looking at a longer time period, ZNGA stock is up a solid 174% from the levels of around $4 seen toward the end of 2018 (vs. an S&P 500 rise of nearly 70%). Much of this outperformance can be attributed to favorable changes in the company’s revenue-per-share (RPS). Zynga’s total revenue grew 148% to $2.3 billion over the last twelve month period, compared to $0.9 billion in 2018. The revenue rise can largely be attributed to the impact of multiple acquisitions of games from Peak Games, Small Giant Games, and Gram Games. The company also saw a 26% rise in total shares outstanding due to share issuances.
As such, on a per share basis, Zynga’s revenue grew 97% to $2.07 for the last twelve month period, compared to $1.05 in 2018. Despite a solid 97% rise in RPS over the recent years, Zynga’s P/S multiple has risen only 10% to 5.2x currently, compared to levels of 4.7x seen in 2018, and we believe that the multiple will expand going forward. Our dashboard, ‘What Factors Drove 174% Change In Zynga Stock between 2018 and now?‘, has the underlying numbers.
Some of the major gaming companies have been on acquisition sprees of late. After Peak, Small Giant, and Gram, Zynga announced the acquisition of Rollic’s hyper-casual games (lightweight games with minimal design and usually free-to-play) portfolio, Echtra, and an advertising company – Chartboost. Larger gaming companies, such as Electronic Arts and Take-Two Interactive have also resorted to acquisition to bolster future revenue growth. Electronic Arts acquired Codemasters, Metalhead Software, Glu Mobile, and Playdemic this year and Take-Two Interactive acquired Nordeus earlier this month. While Activision Blizzard hasn’t looked at M&A since its King acquisition back in 2016, it is currently sitting on net cash of over $6 billion, and any acquisition announcement from the company won’t be surprising.
The acquisitions made by Zynga have resulted in a higher user base and increased user engagement levels for the company over the recent years. The more recent acquisitions of Rollic, Echtra, and Chartboost will likely turn out to be important revenue growth drivers over the coming years. Hyper-casual games have seen a massive growth over the recent years, with it accounting for 31% of total game downloads in 2020, compared to just 12% in 2017, among the top 1,000 games. Hyper-casual games are now the most downloaded gaming genre. 
The Rollic acquisition marks Zynga’s entrance into the fast-growing hyper-casual market. Rollic’s hyper-casual games have seen over 365 million downloads globally. Zynga’s acquisition of Echtra is also important given its popular franchises, including Diablo and Torchlight, in the role-playing games genre, which is the highest revenue generating genre.  Lastly, the most recent acquisition of Chartboost is interesting, given it is an advertising company, and not into gaming. Chartboost’s platform has over 700 million users and runs 90 billion monthly advertising auctions, which will help Zynga expand its advertising reach and help it in better monetization of its games.
On the flip side, there is surely an increased competition with other gaming companies also eyeing a larger slice of the pie of the mobile gaming market. Electronic Arts, for instance, will see significant growth in its mobile gaming revenues from Glu Mobile and Playdemic acquisitions, and it has much deeper pockets to invest in new games or acquire other gaming studios to capture more share of the mobile gaming market.
Looking at the valuation, Zynga, at the current price of under $11, is trading at 4.1x its expected RPS of $2.65 for 2021, slightly higher than the levels of around 3.6x seen as recently as late 2020. However, with the new acquisitions, the company can look forward to better revenue growth over the coming years, and the company is likely to see an expansion in its multiple, boding well for ZNGA stock, in our view.
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 Tyler Technologies vs Take-Two Interactive.Notes: