Company Name: Zynga
Entry Price: $10.30
Target Price: $13.50
Projected Yield: 31%
Time Line: 3-6 months
Position Size: 2%
Zynga, Inc. (ZNGA.US) is an online social game developer based in the United States. Mobile platforms and social media are the company's main areas of expertise. According to its website, Zynga's purpose is to "connect the globe via games." CityVille, FarmVille, and Mafia Wars have been some of the developer's most popular games.
What's the Idea?
Profit from a stock that can expand because of the popularity of online games, a well-developed company strategy, and successful M&A agreements, such as the acquisition of the Peak and Rollic game studios, as well as the Chartboost advertising platform.
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Why Trade Zynga?
Reason 1: several growth drivers at once
We believe that Zynga will continue to enhance its position over time through both organic and inorganic growth via mergers and acquisitions. We anticipate greater investor interest in the company's stock in the near future.
Given the following facts, the consolidation period, which has been ongoing since February 2021, has been maintained over a sustained period.
- strong quarterly performance
- increased revenue expectations for 2021
- realizing the potential of last year's acquisitions
- announcement of the addition of the advertising platform Chartboost
- expected releases of new mobile games
Net Revenue, or Net Bookings, the primary indication for game producers, increased by 69 per cent YoY to $720 million in the first three months of 2021, exceeding the $685 million consensus and the $680 million management expectation. At the same time, revenue was $680 million, up 68 per cent year on year. Adjusted EBITDA was significantly higher than expected, coming in at $162 million versus $151 million. The company's games had an average daily audience of 38 million (+2 million QoQ) and an average monthly viewership of 164 million. The company had 21 million and 68 million active users in the same quarter last year, respectively.
The company's management upped its projection for 2021 based on the first quarter's results and the optimistic state of the mobile gaming market. Net Bookings are now at $2.9 billion, $100 million more than the original forecast and $2.83 billion more than the average expectation.
The majority of the significant growth can be attributed to organic growth and the acquisitions of gaming firms Peak and Rollic last year. According to the management, the mobile games Words With Friends, Empires & Puzzles, and Harry Potter: Puzzles & Spells all had record results. It's
worth noting that the majority of the audience now plays the company's games for free, as evidenced by the ABPU (Mobile Average Bookings Per Mobile DAU) indicator, which measures revenue per user. It is $0.202, which is somewhat lower than last year's result of $0.216. Despite this, Zynga has many possibilities to monetize its dedicated fan base, especially through advertising, which will help its ABPU grow.
The Chartboost acquisition, announced on May 5, aims to expand the company's mobile advertising capabilities. Chartboost organizes 90 billion ad auctions on its mobile advertising and monetization platform (AdTech industry). The sale will be worth around $250 million, financed directly by the company. Management is very enthusiastic about potential synergies, and we tend to agree with them. The acquisition of Chartboost will significantly enhance the potential market size, allow it to monetize its audience, and raise long-term profit more efficiently. Advertising revenues climbed to $123 million in the first quarter of 2021, up from $59 million in the same period the last year, accounting for 18% of Zynga's overall revenue. The Chartboost acquisition is a more complicated and strategically justified investment targeted at diversifying revenue streams, more so than last year's gaming studio purchases, targeted at horizontal expansion in the game business. We assess that the quotes did not correctly address this positive feature because quotes moved sideways after the Chartboost announcement.
The company's planned releases, such as Star Wars Hunters, the first Zynga game set in the Star Wars world, and FarmVille 3, might be another growth engine. New releases can help the company's loyal following grow while also increasing income.
Reason 2: financial condition
Financial figures for the first quarter of 2021 were previously presented, demonstrating the company's significant growth rates while remaining unprofitable. The deficit in the first quarter was $23 million, and Diluted EPS, or diluted earnings per share, was $0.02. However, as the loss is continuously decreasing, there is a good tendency: the loss was $104 million in the first quarter of 2020, and the Diluted EPS was $0.11.
Zynga's financial situation is stable; the quantity of debt is about equal to the amount of cash on hand - $1.3 billion. The company's free cash flow, or FCF, is gradually improving: in 2020, it was $410 million. This indication, however, fell to $165 million in the first quarter of 2021, owing to the coverage of short-term liabilities.
Now, by multiples, the company is trading at the following levels:
- EV/S - 5.0x;
- EV/EBITDA - 5.0x;
- P / FCF - 23.4x.
Since mid-April, several investment companies have set high valuations for Zynga's stock:
- BMO Capital Markets - $15;
- Bank of America - $13.5.
How to Use the Idea
- Buy Zynga stock at $10.30 per share.
- Allocate no more than 2% of your portfolio amount. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell the stock when the price reaches $13.50.
How to Buy Zynga?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type ZNGA.US (Zynga ticker in the NASDAQ) in the search box, and select Zynga in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type ZNGA.US (Zynga ticker in the NASDAQ) and select Zynga in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Cyprus Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.