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Can Zynga Inc (ZNGA) Recover & Make You Money In The Process?

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is zynga overpricedZynga Inc (NASDAQ:ZNGA) is the developer of some of the most popular games that you see on Facebook Inc (NASDAQ:FB), like Farmville and Mafia Wars. Revenues have been declining for the company, and investors are worried about the upward trend in costs and Zynga Inc (NASDAQ:ZNGA)’s free-to-play business model. However, Zynga is poised to make a comeback. Watch out for this company- there have been some recent developments which are going to make it a strong player in the internet gaming market.

Stock performance

Zynga Inc (NASDAQ:ZNGA) witnessed a huge slide in 2012 and is now trading at around $3.21, lower than its 52-week high of $9 a share. This happened due to the internet gaming world taking a hit after the unsuccessful Facebook IPO. The reason for much of the erosion in the value of the stock was due to negative publicity and tax-loss selling. With a market cap of $2.55 billion, Zynga has not given a steady return to investors compared to market indices. However, in the recently quarterly results, Zynga reported a profit of $4 million after accumulating losses for the past few years. One good thing: The company witnessed strong Farmville 2 bookings and a 21% jump in advertising revenue.

Zynga looking undervalued

As I stated, Zynga Inc (NASDAQ:ZNGA) is trading near $3.21 a share. For me, the stock looks undervalued due to certain reasons. The recent $200 million buyback announced in February gives a hint of the same. If I look at the short percentage of the total float of Zynga, it is around 17.50%. This suggests that huge short selling has taken place, which is bringing the stock price down. The low P/E and P/B also gives an indication of the undervaluation.

Online gambling business

With the launch of real money gambling in the United Kingdom, Zynga Inc (NASDAQ:ZNGA) has entered the potentially strong online gaming business. It launched ZyngaPlusPoker and ZyngaPlusCasino in the UK not so long ago- and already has a huge market presence. Although just about 8–10% of Zynga’s revenue comes from UK, the business is set to grow higher. I believe more “fake” money users will switch over to the real gambling business. According to CEO and founder Mark Pincus, 2013 will be a transition year.

We have seen a 35% bull run in the stock price in light of the gambling business launch. In the US, apart from Nevada, no other state has legalized online gaming. If it gets legalized in the future, this could present a gamut of opportunities for Zynga.

Competitors

Electronic Arts Inc. (NASDAQ:EA) has a market cap of $5.3 billion and has a strong base compared to Zynga. Revenue streams are diversified with popular games releasing with their newest versions every year. The new edition of Sim City has seen a sale of 1.1 million copies. The stock has given a return of 19% in the past year. Electronic Arts Inc. (NASDAQ:EA) is not so dependent on Facebook Inc (NASDAQ:FB), like Zynga Inc (NASDAQ:ZNGA) is, and looking to focus on high margin digital content. With the release of the new PS4 and Xbox in the 2013 holiday season, the company has strong growth promises.

Activision Blizzard, Inc. (NASDAQ:ATVI) is another strong competitor to Zynga and has some of the most popular games like Call of Duty, Diablo, and World of Warcraft in its armory. With a market cap of $16 billion, the stock has given a steady return and quarterly revenue growth stands at 26%. Not only in the last quarter; the company has been increasing revenue since 2008. The recent decrease in short selling activity shows that investors are growing more bullish on this tech giant.

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