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Zynga Stock Is a Buy, But Maybe Not Right Before Earnings

Will Healy

Zynga (NASDAQ:ZNGA) reports its third-quarter earnings Oct. 30 after the closing bell. The San Francisco-based gaming company has staged a comeback in 2019. After years of stagnation, Zynga stock has sprung back to life as first revenues and now profits see massive increases. Although this growth makes a compelling case for the company long term, investors should not hurry to buy ZNGA before the company reports earnings.

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For the company’s third quarter, Wall Street forecasts earnings of 5 cents per share. If this estimate holds, it will match the profits reported for the same quarter last year. However, for revenues, analysts predict $384.4 million. This would amount to a 54.4% increase from last year when the company brought in $248.9 million.

In recent weeks, ZNGA stock has achieved its highest levels since its post-IPO fall. As it spent most of the decade trading in the $2-$3 per share range, many wondered whether it would ever recover.

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However, with the revenue, and now the profit growth, Zynga stock has proven itself as more than a flash in the pan. With the advent of smartphones and tablets, Zynga took the opportunity to produce compelling games on the platforms to which gamers increasingly turn. Games such as Words With Friends, Farmville and Zynga Poker continue to boost Zynga’s profile as well as its stock.

Still, investors need to consider its competition. It has faced challenges in the mobile space from Glu Mobile (NASDAQ:GLUU) and Chinese conglomerate Tencent (OTCMKTS:TCEHY). Also, more established players who have traditionally focused on console-based games have begun to increasingly adopt mobile. As InvestorPlace’s Chris Lau reported, Activision Blizzard (NASDAQ:ATVI) has partnered with Tencent on a mobile version of Call of Duty.


ZNGA Benefits From Gaming Bifurcation

However, I see gaming as an industry that may drift away from the console as that device becomes increasingly obsolete. Competitive gamers prefer PC-based platforms which offer faster speeds. More casual players have increasingly gravitated to smartphone and tablet-based games. This trend moves in favor of Zynga as many gamers turn to their personal devices.

For this reason, I think investors should ask when, not if, they should buy Zynga stock. From a longer-term perspective, the company looks positioned to grow its profits by an average of 18.2% per year over the next five years. Despite this growth rate, ZNGA stock trades at about 22.6 times forward earnings. This is despite a move that has taken Zynga stock higher by over 50% since the beginning of 2019.

Investors also have good reasons to not buy before the earnings report. Most of the move higher in Zynga stock took place during the first four months of the year. Since May, ZNGA has traded in a range. Moreover, the company missed earnings estimates on a non-GAAP basis during the second quarter. ZNGA stock still sells at about 5% below the levels it saw before the July earnings report.

The Bottom Line on Zynga Stock

Zynga stock looks poised to resume moving higher long term, but investors should hesitate to buy this stock before earnings. Analysts expect no profit growth from the same quarter last year despite a massive revenue increase. Also, ZNGA has not fully recovered from an unusual earnings miss in the third quarter.

Admittedly, Zynga could deliver a blowout quarter and spike to multi-year highs. It could also disappoint investors and remain in a range. This makes ZNGA a short-term gamble. However, longer term, the outlook for growth, profits and increasing market share look more favorable. This makes Zynga stock a great buy, at least at the right time.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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