Is Zynga Set to Skyrocket?

The Cheat Sheet

With shares of Zynga (NASDAQ:ZNGA) trading at around $3.30, is ZNGA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework: [More from WallStCheatSheet: Aerospace Dominates U.S. Factory Activity in September]

C = Catalyst for the Stock’s Movement

Zynga has 232 monthly active users in 166 countries, and it dominates the free-to-play gaming segment, but that doesn’t necessarily mean it’s a good investment.

The biggest headwind for Zynga at the moment is that its social games aren’t producing enough revenue. There simply isn’t as much demand as there was in previous years. Zynga’s traffic rank has declined considerably since 2011. At that time, it was ranked higher than #400 in the world. It’s now ranked #863 in the world. Over the past three months, pageviews have declined 10.07 percent and pageviews-per-user have declined 1.32 percent. On the other hand, the bounce rate has declined 4 percent (this is a good thing because bounce rate measures how many people visit one page and leave) and time-on-site has increased 3 percent. Therefore, the content being offered is good; it’s simply a matter of getting more people to the site. The content might be keeping more people on the site because many games have been cut in order to cut expenses. Therefore, only the highest quality games remain. Zynga has also cut office space and employees in order to assist the bottom line.

All of the above is interesting information, but it’s not nearly as important as Zynga’s potential in the world of online real-money gaming. ZyngaPlusPoker and ZyngaPlusCasino are a go in the U.K. This will add revenue. It’s also often overlooked that the legal gambling age in the U.K. is 18. This is a bonus for revenue potential. Zynga is aiming to expand into other European countries. If it can do so, the rewards may be high, but it will be a long and frustrating process.

On the domestic front, Zynga has begun making moves for Nevada and Delaware where online gambling is legal. Zynga has already filed an application for a gaming license in Nevada.

The biggest threat in the United States is competition. Many land-based casinos are plotting moves into online gambling. Those brand names will have an edge over Zynga. In order to level the playing field, Zynga must get a good head start and offer something that other casinos don’t offer. EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Let’s take a look at some comparative numbers for Zynga and its current competitors. The chart below compares basic fundamentals for Zynga, Facebook (NASDAQ:FB), and Electronic Arts (NASDAQ:EA). Of course, Facebook offers more than just games, and it’s a much larger company, but it’s still a competitor. Zynga has a market cap of $2.60 billion, Facebook has a market cap of $63.77 billion, and Electronic Arts has a market cap of $5.15 billion.

ZNGA

FB

EA

Trailing   P/E

N/A

1784.67

31.39

Forward   P/E

N/A

34.32

15.49

Profit   Margin

-16.35%

1.04%

4.42%

ROE

-11.72%

0.64

8.29%

Operating   Cash Flow

$195.77 Million

$1.61 Billion

 $378.00 Million

Dividend   Yield

N/A

N/A

N/A

Short   Position

17.50%

8.30%

5.20%

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Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong        

The debt-to-equity ratio for Zynga is stronger than the industry average of 0.10. This shouldn’t be overlooked. This is good news because it will put Zynga in a stronger position than many other companies when interest rates increase. The balance sheet is excellent.

Debt-To-Equity

Cash

Long-Term Debt

ZNGA

0.05

$1.28 Billion

$100.00 Million

FB

0.20

$9.63 Billion

$2.36 Billion

EA

0.28

$1.49 Billion

$554.00 Million

 

T = Technicals Are Mixed     

Zynga has been all over the map when it comes to stock performance.

1 Month

Year-To-Date

1 Year

3 Year

ZNGA

-8.84%

39.83%

-69.85%

N/A

FB

0.99%

1.09%

1.47%

N/A

EA

-7.97%

19.66%

14.23%

-11.22%

 

At $3.30, Zynga is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

3.35

100-Day   SMA

2.91

200-Day   SMA

3.07

 

E = Earnings Have Been Inconsistent                        

Revenue has consistently improved on an annual basis, but earnings have been inconsistent. Zynga needs to show consistent annual profits if it wants to attract more investors.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

19.41

121.47

597.46

1.14B

1.28B

Diluted   EPS ($)

-0.18

-0.31

0.11

-1.40

-0.28

 

When we look at the previous quarter on a year-over-year basis, we see a very slight decline in revenue and a substantial improvement in earnings. However, it still wasn’t a profitable quarter.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

311.24

320.97

332.49

316.64

311.16

Diluted   EPS ($)

-1.41

-0.12

-0.03

-0.07

-0.06

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

It depends on the industry. If we’re referring to social gaming, then trends don’t support the industry. If we’re talking about online real-money gaming, then trends support the industry. Many states are struggling for revenue. It’s likely that some of these states will eventually legalize online gambling in order to add a revenue stream. This would benefit Zynga if it can successfully make its move into online real-money gambling. Approximately 8 percent of gambling is done online, and that number is expected to increase to 10 percent within two years. EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

Falling demand, no improvement in traffic, and weak margins are bad signs. On the other hand, if Zynga can successfully maneuver its way into the online real-money gaming market, then the potential is high. The bad news is that it will be a lengthy process, and if the stock market struggles during this process, then investors will be more likely to part with their Zynga shares than their shares in more defensive names.

All factors considered, Zynga is a WAIT AND SEE. This might be a good speculative play due to the enormous potential, but it’s also high risk as well as an extremely volatile stock.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro. More Recommended Stories

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