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.
Looking ahead
Zynga may not be as diversified in the digital content world as its peers; however it’s growing quite fast as suggested by the record gaming activity claimed by Facebook in its recent quarterly results. It has been constantly adding new games to its offerings. The launch of Zynga with Friends last year hints at Zynga trying to venture into its own social gaming network. It recently launched a new game called Zynga slots which topped the list of the fastest growing Facebook Inc (NASDAQ:FB) games calculated by monthly average users. Moreover, Zynga has another big hit in the app store with the launch of the sequel to Draw Something.
The company is in a re-organization phase, closing down unpopular games and focusing more on high-growth areas like mobile gaming. The strong balance sheet suggests that even if the social gaming business slows down in the future, Zynga will remain intact and weather the storm with sufficient cash in hand. Zynga Inc (NASDAQ:ZNGA) has a cash component of $1.28 billion which can be utilized in acquiring any upcoming Internet start-up. The acquisition of Game of Thrones is a sign of diversification of revenue streams and open minded management by the company.
Conclusion
If Zynga makes it big in the gambling business, it can trade much higher from current levels. I personally have faith in the fundamentals of the company which will deter it from any unwarranted outcome. The gaming industry is a hits-driven business and developers constantly need to test and release newer versions and betas of exciting games. And Zynga, with its technical expertise, can certainly provide that. I predict a strong upside potential in the company, which makes the stock a buy at current levels.
Tanya Kanodia has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard.
