Zynga: A Good Web 2.0 Buy
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Zynga (NASDAQ: ZNGA) has emerged as a big player in the social networking boom with the stupendous success of its social gaming services on Facebook (NASDAQ: FB). Although many say that Zynga is highly reliant on Facebook for most of its revenue, it is not wrong to say that Zynga made Facebook much more addictive, apart from resulting in around 20% of Facebook's revenues in 2011. Zynga remains in a premium position to launch more hit games compared to its peers, due to its clever marketing practices and its positioning on Facebook's platform. With the stock vastly under-appreciated and trading around its 52 week low, we would rate this stock as a buy.
Key Positives for Zynga:
Large Size and Scale: Zynga is the largest provider of social gaming services, with more than 2,800 employees, 182 million monthly unique users and 65 million daily active users – many times larger than the closest competitor. Zynga’s size and scale help it to efficiently market its games to users at a low cost, making it easier for the company to innovate and develop. Its position on Facebook and the popularity of its old games helps it to launch new games more easily and profitably than its competitors.
Revenue from Hit Titles Likely to Continue: Looking at past revenue numbers and consensus estimates we see that FarmVille, CityVille, and Zynga Poker have performed well y/y in terms of revenues even when daily average users (DAUs) are declining. This trend could very well be devoted to Zynga’s monetization model, which derives most of its revenue from the 2-5% of players that are willing to pay money for the virtual credits to improve their game experience. As long as that 2-5% of users remain active, the company should see continuous revenue incoming.
Robust Monetization Model-Impact of Mobile Usage: Zynga’s monetization model, based on user behavior, helps it to maintain steady revenues across different platforms. Zynga acquires 90% of revenues by selling virtual goods (and not from advertising, as other social platforms are doing), making an increase in mobile usage a positive growth driver for Zynga, as user buying habits don’t change as they change platforms.
Increasing Efforts to Decrease Over-dependence on Facebook: Zynga’s web platform, Zynga.com, has attracted 350k of DAUs until now. Zynga continuously looks to strengthen its market position in the long term with the introduction of Zynga’s mobile applications for the Android and iOS platforms.
While Zynga faces risks in the form of increased competition, its leading position in the market helps it leverage its products with ease. With sustained increases in mobile usage, the company has good future prospects. As the stock trades with a PE ratio of ~14, much lower than its web 2.0 peers, we rate this stock as a buy.
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