Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

This Just In: Upgrades and Downgrades – Zynga Inc (ZNGA), Glu Mobile Inc. (GLUU)

Page 1 of 2

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and “initiating coverage at neutral.” Today, we’ll show you whether those bigwigs actually know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS to track the long-term performance of Wall Street’s best and worst.

Zynga Inc (NASDAQ:ZNGA) could zoom!
In a call that seems destined to be called incredibly brave or incredibly dumb — and perhaps even both — Bank of America (NYSE:BAC) announced this morning that it’s upgrading shares of social/mobile gamer Zynga Inc (NASDAQ:ZNGA).

Zynga Inc (NASDAQ:ZNGA)And not just any upgrade, either. This is an upgrade coming just hours before Zynga reports its Q4 earnings (today, after market close). It’s an upgrade that looks like the polar opposite of the cautious, reasonable downgrade that Northland Securities just assigned to rival gamer Glu Mobile Inc. (NASDAQ:GLUU) last week — likewise ahead of an earnings report due out this evening. And it’s an upgrade representing a 180-degree reversal of what B of A was saying about Zynga as recently as yesterday — an upgrade all the way from underperform (that’s “sell,” to you and me) to buy.

So… what is it exactly about Zynga that has Bank of America not just going out on a limb, but scrambling on all fours, fast as it can, to rush right out there on the outermost twig and tell investors to buy Zynga before the news breaks?

Valuation matters
In a word, it’s the valuation. Looking at Zynga today, Bank of America sees a stock that costs just $2.70 a share, but boasts $2.20 a share in cash and asset value. It sees a company collecting $200 million annually in revenue from its online poker business, and generating perhaps $200 million more from its mobile business.

Viewed from this perspective, therefore, once you strip out its assets, B of A sees Zynga as a $392 million business that generates easily $400 million or so in annual revenue. And that makes for a pretty enticing one-times-sales valuation on Zynga’s business, as compared to the average gaming industry stock that costs 2.5 times sales. By way of comparison, gaming giant Activision Blizzard, Inc. (NASDAQ:ATVI) costs a whopping 2.9 times sales, while peer gamer Glu fetches 1.8 times sales. That latter number may be significant, given that Glu, like Zynga, is not currently making a profit.

On the other hand, though, giant Electronic Arts Inc. (NASDAQ:EA) is earning a profit, yet it costs only 1.2 times sales — a valuation all but indistinguishable from the one-times-sales valuation that Zynga carries (when viewed from the perspective B of A is taking).

Beware the caveats
The question, of course, is whether you really should be looking at this like B of A does? On the one hand, sure, B of A may know something we don’t. They may have an inkling of some seriously good news that Zynga will report tonight, and so feel confident in spinning on a dime today and turning their sell rating into a buy. For instance, right in their report on Zynga, B of A notes that “mobile trends” are starting to look “more stable post-Q3 results,” and that Zynga may beat Street estimates tonight — resulting in more “downside risk” for shorts, than Zynga fans incur in hoping it will zoom to the upside.

On the other hand, though, I can’t shake the suspicion that B of A is missing something important here.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!