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).
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?
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.