Will It Ever Be Time To Buy Zynga?

By Ryan Guenette - August 3, 2012 | Tickers: ATVI, EA, GLUU, THQIQ, ZNGA | 0 Comments

• Email
• Print

Zynga Incorporated (NASDAQ: ZNGA) went public on December 16^th, 2011, at an offering price of $10.00, valuing the company at around $7.0 billion. After initially rallying, and reaching a high point of $15.91, Zynga began its long move downward. Most recently, Zynga's shares were pummeled 37%, when Zynga reported second-quarter results. They stated that second-quarter sales totaled $332.5 million, well below the analyst estimate $343.1 million. Earnings per share estimates were for a $0.06 profit, yet the company's earnings per share totaled only $0.01, excluding certain items. Certain items included, Zynga fluctuated to a second-quarter loss. Additionally, year over year revenue growth slowed, as Zynga’s management cited an altering, more challenging ecosystem on Facebook, as well as significantly lowering its projections for the “Draw Something” game. According to Zynga Inc., modifications to the Facebook website made it more difficult for users to uncover existing games. Accumulating to the issue, Zynga stated that its games are now competing with an expanding array of applications, both on the social society and mobile platforms. Arvind Bhatia, an analyst at Sterne Agee & Leach Incorporated, put the current situation perfectly. “It’s a disaster. It’s starting to look more and more like a fad, and any hope of a second-half recovery is shot with these kinds of numbers.” So will it ever be time to buy Zynga?

Zynga Will Not Be Profitable Until 2015, Wait What?

In 2011, Zynga Incorporated reported earnings per share of -$1.40, and net income of negative $404 million. In 2012, the average consensus believes Zynga’s earnings per share will expand $1.10, to -$0.30. In the same year, Zynga is anticipated to report net income of negative $250 million. Two years in as being a public company, the business is still not projected to be making money. That is a colossal problem, as a company losing money has to rely on loans or other means of income to pay their employees and operate as a business. In 2013, the street sees Zynga increasing its earnings per share to -$0.14. On the net income side, Zynga is estimated to report negative $126 million, remaining underwater three years since going public. The trend of losing money is expected to continue into 2014, as the average analyst estimate portrays Zynga deriving -$0.08 from its business, and losing $13.5 million in net income. The first year Zynga Incorporated is anticipated to be profitable is 2015, when estimates show the company’s net income reaching $51 million. The fact that Zynga will not be profitable until 2015 is treacherous for the company, as all the company has until turning profitable is “hopes” that one day Zynga will be a company that makes money. The chart below displays Zynga Incorporated’s sales, operating profit, net income, net margin, operating margin, and earnings per share over the coming years.

The Fundamental Shift in Gaming

An investor does not need to be a market trend analyst to recognize the change in the way the world is now gaming. The chart below presents the evolution of gaming, then and now.   

No longer does the consumer have to buy a console, game, and controller to play a game; all they need is a computer, phone, or Facebook account. The trend is vividly pointing to a more global and mobile gaming industry. This plays right into Zynga’s court, as Zynga offers games on the platforms of Facebook, mobile devices, and the World Wide Web. The company's main source of revenue is selling games or products related to their games, such as tokens that offer substantial advantage in the game, which are both considered as virtual goods. The virtual goods market is just beginning to expand, as the chart below displays.      

All in all, Zynga is ideally positioned to take advantage of the fundamental change in the gaming industry, as their products offer substantial exposure to the incredible growth that will present in this industry in the foreseeable future.

Is Zynga Top Dog?

Compared to some of Zynga's most prominent competitors, such as: Electronic Arts Incorporated (NASDAQ: EA), THQ Incorporated (NASDAQOTH: THQIQ), Glu Mobile Incorporated (NASDAQ: GLUU), and Activision Blizzard Incorporated (NASDAQ: ATVI), Zynga stacks up relatively in line.

In terms of growth, Zynga is last in the industry, with Activision leading the pack. The only stock in the sector that pays out a dividend is Activision, which yields 1.50%. In the fundamental ratio comparison, only Activision and Electronic Arts are profitable, with Activision having the most attractive price to earnings ratio. When growth is taken into account, Electronic Arts is the most attractive. In the net profit margin comparison area, Zynga stands out to the downside, while Activision takes yet another sector.

The Foolish Bottom Line

Zynga has fallen 71% since going public. This undeniably points to the fact that the underwriters of the initial public offering overshot the fair price of what Zynga Incorporated should truly be trading at. Zynga is in an extremely volatile industry, as one day Zynga could have a blockbuster game, and the next greatest and latest could storm the world. My investing philosophy revolves around long-term sustainability and growth. Zynga Incorporated is not even profitable, and will not be in the black until 2015. Years from now the current price may look like a bargain, but I would not recommend Zynga to anyone focused on long-term growth.       

• Email
• Print
• Feedback