The Halcyonite

Research Report: ZNGA Earnings

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halcyonite

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4–5 minutes

by: Cosmo V. (Grade 11)

Date31/01/2021
SpeculatorCosmo
ContributorsN/A
TradeZynga
TickerZNGA
Entry Price8.68USD
Exit PriceN/A

THESIS: Zynga is a global leader in interactive entertainment with a mission to connect the world through games. It has a promising expansion plan, good leadership, a strong team, a relatively underrated stock price, and promising earnings prospects. Not extremely high growth is likely, but earnings might be a game-changer short-term.

TRADES MADE: I bought 210 shares of ZNGA at 8.68 USD. I plan on potentially buying an additional 40 in the week to come.

RESEARCH:

(Zacks Investment Research), published 26/01/2021 – Investors will be hoping for strength from ZNGA as it approaches its next earnings release, which is expected to be February 10th, 2021. The company is expected to report an EPS of $0.09, up 125% from the prior-year quarter. Meanwhile, our latest consensus estimate is calling for revenue of $674.64 million, up 55.66% from the prior-year quarter.

(“My 3 Best Stocks to Buy Right Now”), published 23/01/2021 – With popular titles such as Zynga Poker, Toy Blast, Farmville, and mini-games based on the Harry Potter series, Zynga is one of the hottest mobile video game developers on the market. Its most recently reported quarter was the best in its entire history. Revenue and operating cash flow improved in Q3 by 46% and 65%, to $503 million and $113 million, respectively.
Besides that, Zynga saw its monthly active users metric rise 25% year over year to 83 million — a level not seen since six years ago, back when Farmville was wildly popular. It has also been able to turn a profit for four of the past five fiscal quarters. The game developer’s free cash flow has fluctuated between a loss of $44 million, to a gain of $142 million over that period.

Zynga CEO Frank Gibeau says he’s bullish on the sector and predicts double-digit growth. He says 5G entering the market and Apple (AAPL) tech developments will allow for multi-year growth. Market conditions were favourable in 2020 (and likely continue to be at the moment).
The Rollic expansion is very interesting- with an ad-based monetisation and “one minute game” driving thesis. Gibeau says that this type of game – the “hyper-casual” gaming category – has been one of the fastest-growing categories on mobile. 

(Zynga Blog), published 10/12/2020 – Rollic, a subsidiary of Zynga Inc. (Nasdaq: ZNGA) and a global leader in interactive entertainment, announced [10/12/2020] that it has recently closed its acquisition for the popular matching game Onnect from CHEF Game Studio. Onnect has been acquired in full for a closing payment of $6 million, and a potential future payment of $1 million, based on terms and conditions agreed upon by the parties.

(Martyn Reymerlyn, Yahoo Finance), published 26/05/2020 – Heading into the second quarter of 2020, a total of 59 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 23% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ZNGA over the last 18 quarters. With hedges’ capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
— What this might indicate, is that hedge funds that aren’t yet targeted by retail investors might feel comfortable with moving capital into ZNGA (As of 29/01/2021, 69.6% of Zynga shares are owned by institutional investors).–

Fundamentals: 

*Market Cap* 52-week range*PEG ratio**PE ratio
10.69B5.65-11.091.43186.4
*provided by Yahoo Finance
** provided by Trading 212

ZNGA’s current valuation metrics, including its Forward P/E ratio of 25.1. This represents a discount compared to its industry’s average Forward P/E of 31.14.
Zynga was holding an average PEG ratio of 1.45 at Friday’s closing price.

(“My 3 Best Stocks to Buy Right Now”, MSM, motley fool), published 23/01/2021 – At the moment, Zynga stock is trading for 5.8 times revenue. That is a significantly cheaper valuation than the market is giving key competitors Take-Two Interactive (NASDAQ: TTWO) (7.1 times sales), and Activision Blizzard (NASDAQ: ATVI) (9.6 times sales). Given the ever-rising popularity of online gaming amid the coronavirus pandemic, I’d give investing in Zynga stock a green light. The company also expects to report that in 2020, revenue hit an all-time high of $1.93 billion – a massive increase over its $1.32 billion in sales in 2019.

Marketbeat.com sees Bilibili (NASDAQ:BILI) as ZNGA’s largest competitor (by market cap – at 37BUSD).

RISKS:

  • Margin doesn’t improve, and the “you gotta invest to make money” CEO’s justification for it doesn’t land as well as last time. 
  • Market volatility renders ZNGA earnings irrelevant (with WSB/hedge funds clash) and the stock reflects the market
  • Hedge funds pull out of peak gradually because fears of WSB will short the stock (highly unlikely because none of the twenty largest hedge funds own this stock anyways, and the remaining hedge funds will likely not be bothered by WSB)

WORKS CITED (MLA 8):

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