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Why Zynga Stock Gained 11.1% in May

Keith Noonan, The Motley Fool

What happened

Shares of Zynga (NASDAQ: ZNGA) gained 11.1% in April, according to data from S&P Global Market Intelligence. While the broader market saw significant sell-offs in the month, the video game publisher was able to emerge from the period with double-digit gains thanks to a strong earnings report and evidence that the business has emerged from its turnaround period and is ready to see more consistent sales and earnings growth.

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Zynga reported first-quarter earnings after market close on May 1, and the company delivered strong results that topped expectations after factoring in performance-related bonuses that it paid to recently acquired studios. Sales grew 27% year over year in the quarter to hit $265 and bookings climbed 61% to $359 million.

A pair of hands using a mobile phone against a sunlit background.

Image source: Getty Images.

So what

Zynga's $0.06-per-share loss for the period was actually substantially worse than the company's guidance and the average analyst target, but mark this down as a rare instance in which coming up short on expected profits and paying extra can be counted as positive events. When Zynga acquired development studios Gram Games and Small Giant Games, it agreed to pay out performance-based incentives if the studio's respective titles managed to hit certain milestones. Making poor acquisitions has dogged Zynga in the past, so it's encouraging to see that the games and studios that it has recently brought into the fold are living up to (or exceeding) the high end of expectations. 

Now what

Zynga will continue to deliver content updates for key titles like CSR Racing 2 and Zynga Poker, and the company always seems to be on the lookout for new studios that it can bring into the fold through acquisition, but investors are likely eager to see whether the business can move forward with greater success when it comes to launching fresh, new titles. The company has a multiyear deal with Disney to develop a free-to-play mobile game based on the Star Wars license, with an option for another game, provided The House of Mouse is happy with the results. Not much is known about the initial title, but delivering a hit could be a big performance catalyst for Zynga and open the door for rapid sales and earnings growth and other new projects. 

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Keith Noonan owns shares of Walt Disney. The Motley Fool recommends Walt Disney and Zynga. The Motley Fool has a disclosure policy.