Zynga, Inc. (ZNGA) is mostly known for its online games such as "Words with Friends" and "Farmville," and as a leader in the social gaming sector, it was once a Wall Street "darling." Zynga had an initial public offering and the stock did very well initially, going well past the IPO price of $10 per share. However, investor enthusiasm did not last long, and it seemed that making money in this industry was more difficult than some investors expected. Then came the much anticipated Facebook IPO and since that went poorly, it created less enthusiasm for investors to buy and hold stocks in the social networking sector. However, it is worth taking a fresh look at Zynga for a number of reasons now.
Zynga shares are trading for about $2.60. That is just a fraction of the IPO price, and way below the 52-week high of $15.91 per share. At about $2.60 per share, this stock looks like an incredible bargain when you look at the balance sheet. Zynga has around $1.3 billion in cash, and this is equivalent to roughly $1.70 per share in cash. It has about $100 million in debt. After the cash is backed out, it means the market is only valuing this company with an enterprise value of about $700 million. That seems very low, considering the long-term potential of the online gaming industry.
Last year, a Wall Street Journal article summarized why Zynga could be an attractive takeover target based on the fact that it has around 35 million "Zynga Poker" users. It also noted that International Game Technology (IGT) offered to pay up to $500 million for Double Down Interactive, a casino game developer on Facebook, which at the time had about 5 million users. In addition, Caesars Entertainment (CZR) paid up to $200 million for Playtika, a slot machine game company with around 7 million users. If you compare these values with the 35 million users Zynga has for just its poker game, this company looks like a bargain with an enterprise value of roughly $700 million. The Double Down deal valued each user at about $100, and if that same value was applied to Zynga with 35 million poker users, that would imply a $3.5 billion value (just for the poker games).
What's even more interesting is that since that Wall Street Journal article came out, Zynga has moved aggressively into real-money gambling. It has applied for a gaming license in Nevada, and it recently pre-launched two websites, "Zynga Plus Poker" and "Zynga Plus Casino" in the United Kingdom. In the future, online gambling might also be legalized in the United States, especially since states and the Federal government need to find new tax revenues to fill major budget gaps.
A Seeking Alpha author feels that Las Vegas Sands (LVS), MGM Resorts International (MGM) or Wynn Resorts (WYNN) could be possible Zynga suitors due to its push towards real money gaming, online technology and its significant user base. With the stock trading at very low levels, the downside appears limited. Of course, the risk is that Zynga burns through over $1 billion in cash, and online gambling never catches on enough for this company to turn in solid profits, but that seems unlikely. This could be an ideal bet on the future of online gambling, and perhaps even benefit from a potential takeover in the future.
Here are some key points for ZNGA:
Current share price: $2.60
Earnings estimates for 2012: 3 cents per share
Earnings estimates for 2013: 1 cent per share