Zynga’s stock (NASDAQ: ZNGA) gained almost 50% – increasing from $6 at the beginning of the year to around $9 now, significantly outperforming the S&P500, which grew 4%. Why? Gaming companies, such as Zynga, stand to benefit in the current crisis, as the demand for gaming has gained traction, given that more people are confined to their homes, eschewing more public forms of entertainment. Additionally, while the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery.
But is this all there is to the story?
No, not quite. Despite the recent rally, Trefis estimates Zynga’s Valuation at about $12 per share, roughly 30% above the current market price based on two key opportunities and a risk.
The first opportunity we see is to Zynga’s Revenue growth over the coming years. 2020 is expected to be a great year for Zynga’s top line expansion. This is not only due to the impact of Covid-19, but also due to the company’s recently acquired gaming portfolios of Small Giant Games, Gram Games, and Peak Games. Zynga’s popular games include Merge Dragons!, Zynga Poker, CSR 2, Words With Friends, Empires & Puzzles, and Wizard of Oz Slots, among others. The user engagement for Zynga’s games has risen in the recent past. Zynga’s Daily Active Users grew slightly from 21.7 million in 2017 to 21.9 million in 2019, while its Average Booking Per Daily Active User grew sharply from $0.11 in 2017 to $0.19 in 2019. The company recently announced its plans to acquire Rollic, a mobile games developer with a portfolio of hyper-casual games, and it will further drive the company’s sales growth.
The second key opportunity stems from Zynga’s valuation multiple compared to its peers. The stock now trades at 26x its projected 2020 adjusted earnings per share of about $0.35. This is largely in-line with its peers, Electronic Arts and Activision Blizzard, trading at 25x forward earnings. However, Zynga’s growth over the recent years has been much faster than its peers. While Zynga’s revenues grew 57% over the last two years, Activision Blizzard saw a decline of 8%, and Electronic Arts has seen a revenue growth of 8% over the same period. Similarly, looking at the bottom line, Zynga’s adjusted earnings have more than doubled, compared to 4% growth for Activision Blizzard and a 13% growth for Electronic Arts. As we look forward, we believe Zynga’s revenue and earnings growth will continue to outperform some of its peers. As such, we believe a P/E multiple close to 34x will be appropriate for Zynga.
That said, there is a near term risk in the company’s Net Margins.
The company is seeing an increase in net deferred revenues, which is expected to have a significant impact on the company’s margins in 2020, along with other factors, such as increase in amortization of acquired intangible assets, as stated by the company’s management in its recent quarterly earnings conference call. However, we expect margins to improve over the coming years with an overall increase in Zynga’s active user base.
Looking at the broader economy, the rebound in growth and its timing hinge on the containment of the coronavirus spread. Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.
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