Zynga Inc (ZNGA), Electronic Arts Inc. (EA), Perfect World Co., Ltd. (ADR) (PWRD): What Will They Do?

Page 1 of 2

Some analysts suggested that Activision Blizzard, Inc. (NASDAQ:ATVI)’s stock rose recently because of their strong earnings, or because of perceived improvement in the gaming industry. However, I would argue that the company’s statement that they are considering, “substantial stock repurchases, dividends, acquisitions, licensing or other non-ordinary course transactions” is the real reason for investor enthusiasm around the stock. The big question now is, what will they do?

Zynga Inc (NASDAQ:ZNGA)Only One Of These Makes Sense
If Activision-Blizzard decides to make an acquisition, Electronic Arts Inc. (NASDAQ:EA) would be the big fish in the pond. The company has several great brands in the Madden, NCAA, Sims, Crysis, Assassin’s Creed games as well as over 250 mobile games. The problem is, their cash flow generation is wildly inconsistent. In two of the four quarters last year, the company actually reported negative operating cash flow. While $938 million of net cash looks good, compared to a market cap. of over $5 billion, this purchase would need to significantly add to earnings to make sense. The other challenge would be getting anti-trust clearance since Activision-Blizzard and Electronic Arts co-dominate the console industry.

Jumping both feet into the mobile and casual gaming business would mean an acquisition of Zynga Inc (NASDAQ:ZNGA). In the last few years, they have generated positive free cash flow. However, in the last four quarters, Zynga reported a net loss each time. The good news is, Zynga has attractive mobile titles like Cityville, Farmville, and Words With Friends, and $1.577 billion in net cash on the balance sheet. However, the company is expected to lose money the next two years. Even at half the market cap. of Electronic Arts Inc. (NASDAQ:EA), Zynga Inc (NASDAQ:ZNGA) doesn’t seem to bring nearly enough to the table.

One acquisition that could make sense is, online gaming specialist Perfect World Co., Ltd. (ADR) (NASDAQ:PWRD). The company has 12 online multiplayer games currently, just released 3 new games, and has 3 new games in development for 2013 and beyond. The company’s primary user base is in China, where Activision-Blizzard only gets about 9% of their revenue. In addition, the company generated about $154 million in positive free cash flow last year, and has $423 million in net cash on the balance sheet. The stock seems cheap at just 5.5 times projected earnings, and analysts are calling for 10% EPS growth in the next few years. Since Perfect World Co., Ltd. (ADR) (NASDAQ:PWRD) carries a $550 million market cap. and $423 million of that is cash and investments, Activision-Blizzard would get a lot of company for very little.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

Subscribe

Enter your email:

Delivered by FeedBurner

X

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!