[Updated: 8/10/2021] ZNGA Stock Update
Zynga (NASDAQ: ZNGA) recently reported its Q2 results, which were below our estimates. The company reported revenues of $712 million, in-line with the consensus estimate of $713 million but slightly lower than our forecast of $725 million. The company’s adjusted EPS of $0.05 was well below the $0.11 per Trefis and $0.09 consensus estimates. While the company benefited from its recent acquisitions, including Rollic, a slower than expected growth in user pay impacted the company’s overall performance. Note that is was a tough comparison to the prior year quarter, which benefited from Covid-19 related lockdowns, as people were confined to their homes, eschewing more public forms of entertainment. This resulted in higher user-engagement levels for gaming companies, including Zynga.
Looking forward, the company has lowered its outlook for revenues to be around $2.8 billion, 3% lower than its previous guidance. This can primarily be attributed to two factors – 1. reopening of economies resulting in lower user engagement levels, and 2. Apple’s ad-tracking changes resulting in higher player acquisition costs for Zynga. Following a dismal Q2, and lowered guidance, ZNGA stock plummeted 18% in a single trading session on Aug 6.
We have updated our model following the Q2 release. We now forecast sales to be $2.6 billion for the full-year 2021, up 33% y-o-y, compared to our previous estimate of around $2.9 billion, and lower than the company’s guidance. Looking at the bottom line, we now estimate adjusted EPS to be $0.36, compared to our earlier estimate of $0.45. We believe that the impact of Apple’s changes to ad tracking on Zynga’s earnings will likely be higher than earlier estimated. Given the changes to our revenues and earnings forecast, we have revised our Zynga Valuation at a little over $11 per share, based on $0.36 expected EPS and a little under 31x P/E multiple for 2021. Although this marks a 20% discount to our prior estimate, it is still at a premium of around 37% to the current market price of $8, implying that ZNGA is undervalued currently, and investors can use this dip to buy for long-term gains.
[Updated: 8/4/2021] Zynga Q2 Earnings Preview
Zynga (NASDAQ: ZNGA) is scheduled to report its Q2 2021 results on Thursday, Aug 5. We expect the company to likely post revenue and earnings above the consensus estimates, primarily led by continued growth in the company’s key franchises – Empires & Puzzles and Merge Dragons. Zynga’s top-line will also be bolstered by contribution from its recent acquisitions. However, the company has cautioned for some pressure on advertising due to changes in the policies related to advertising from Apple. Barring the pressure on advertising, we expect Zynga to navigate well based on these trends over the latest quarter.
Furthermore, our forecast indicates that Zynga’s valuation is $14 per share, which is 40% above the current market price of around $10, implying that ZNGA stock is undervalued at its current levels. Our interactive dashboard analysis on Zynga Pre-Earnings has additional details.
(1) Revenues expected to be slightly above the consensus estimates
Trefis estimates Zynga’s Q2 2021 revenues (total bookings – includes change in deferred revenue along with total revenue) to be around $725 million, slightly above the $713 million consensus estimate, and $710 million per the company’s provided guidance. Despite the economies opening up with vaccination programs underway in multiple countries, the user engagement levels for gaming has remained on the higher side, compared to the pre-pandemic levels, and Zynga, in particular, has benefited significantly, due to its recently acquired gaming portfolios, which should bolster the overall top-line growth in Q2. Zynga’s Q1 2021 total bookings were up a solid 69% y-o-y to $720 million, primarily driven by higher user engagement levels for its top games, as well as the contribution from acquisitions of games from Rollic. Our dashboard on Zynga Revenues offers more details on the company’s segments.
2) EPS likely to be above the consensus estimates
Zynga’s Q2 2021 adjusted earnings per share (EPS) is expected to be $0.11 per Trefis analysis, two cents above the consensus estimate of $0.09. The company’s net loss of $23 million in Q1 2021 was much better than a $104 million loss in the prior year quarter. However, on an adjusted basis, the company reported earnings of $84 million or $0.08 on a per share basis. For the full year 2021, we expect the adjusted EPS to be higher at $0.45 compared to $0.35 in 2020, and above the $0.40 consensus estimate.
(3) Stock price estimate a large 40% above the current market price
Going by our Zynga’s Valuation, with an EPS estimate of $0.45 and a P/E multiple of 31x in 2021, this translates into a price of $14, which is 40% above the current market price of around $10. In fact, at the current market price of $10, ZNGA stock is trading at just 22x its 2021 EPS estimate of $0.45. We continue to believe that Zynga deserves a higher P/E multiple given the strong revenue and earnings growth delivered over the recent past, a trend expected to continue going forward, as well.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.
While ZNGA stock looks undervalued, 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 IAC Interactive vs Activision Blizzard.