Why Wouldn’t You Buy These Cash-Rich Companies?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The balance sheet is the best financial statement to get a quick snapshot of a company’s overall financial health. It shows you accumulation of all profits, expenses, debts, and retained earnings the company has accumulated up to that point -- which makes it a great place to quickly scan for signs of a potential winning investment. With balance sheets boasting minimal to no debt and strong net cash positions, the three stocks below might be worth a closer look.
Will Zynga (NASDAQ: ZNGA) Actually Move Higher?
This is a question many investors have been asking of the social media video game maker. It has barely been public more than a year, but it's already down approximately 80% from its $15.91 all-time high, and approximately 65% since it went public on December 16, 2011.
The company has had a recent exodus of senior managers, most recently Chief Game Designer Brian Reynolds, and investors remain quite skeptical about its future revenue growth. So why would anybody buy the stock?
That can be answered in one word: cash. In its most recent quarter, Zynga reported having approximately $1.3 billion in cash against only $100 million in debt. That means the company is approximately 50% net cash at its current trading price -- a very strong net cash position.
In addition, the company has operationally performed rather well, meeting or exceeding analyst estimates in three of its last four quarters. Moreover, those same analysts expect a strong 20% per annum revenue growth over the next five years. Lastly, with a relatively cheap enterprise value/EBITDA valuation of 1x, and the company's positive free cash flow near $20 million the last quarter, I think investors have some legitimate optimism with the stock.
If you're looking to diversify this position with another cash-rich video game maker, look no further than Activision (NASDAQ: ATVI). The company just recently scorched higher on a blowout earnings report that smashed consensus estimates by $0.06. Its diversified video game lineup seems to be working out well for the firm, which currently enjoys great success with Call of Duty and Skylanders. However, as Activision sits at a new 52-week high, should we buy the stock as well?
Activision has in fact smashed consensus earnings estimates in each of the last four quarters by an average of 53.3%, giving us a clear indication that the company is firing on all cylinders. Moreover, with a debt-free balance sheet and approximately $4 per share in net cash, the company has a very strong financial position. Its relatively strong 30% operating margins and 1.4% dividend yield make it all the more tempting. And its mouth-watering free cash flow, at approximately $1 billion annually, gives me a final reason to believe that Activision is a winner.
Is It Time to Finally Buy Groupon (NASDAQ: GRPN)?
I don’t know about you, but I have used Groupon’s services frequently; they simply provide a nice product at a great price. Unfortunately, like Zynga, the stock has been horrendous, down approximately 80% from its IPO on Nov. 4, 2011. Fortunately, though, like Zynga, it has a sterling balance sheet: absolutely no debt, and just over $1.80 per share in net cash. Does this mean it is time to buy Groupon as well?
The recent surge in Groupon’s price from its $2.60 52-week low has made the company less attractive, but I still think it has legs to move higher. The company has now met or exceeded analyst estimates over the last three quarters. In addition, these analysts are still predicting very strong 25% annual growth over the next five years. The company also generated a strong $300 million in free cash flow this past year which is not too shabby at all. Since the company now trades at a still-enticing 1.1 times its enterprise value/EBITDA and price to expected growth rate, I think Groupon is a buy.
The Inside Scoop:
Analyzing a company first through its balance sheet can give an investor a great initial screening tool on whether or not the company is financially healthy. As described above, Zynga, Activision, and Groupon are three companies that have not only a sterling balance sheet, but some favorable valuations that should push their stocks higher in the foreseeable future.
Wiseinvestors has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!