Why Zynga's Turnaround Could Come With Almost 50% Upside

Zynga Inc. (NASDAQ: ZNGA) shares made a small gain on Wednesday after Wedbush said that it can see this stock making about a 50% run over the next year and that a turnaround is underway.

The firm issued an Outperform rating on Zynga with a $6 price target, implying an upside of 47% from the most recent closing price of $4.07.

On Tuesday, Wedbush hosted investor meetings with Zynga’s CEO Frank Gibeau. The firm ultimately found that Gibeau is pleased with the progress of Zynga’s turnaround thus far, although he sees a long runway ahead for continued improvement.

Wedbush said in its report:

A combination of cost discipline and innovation, as reflected in the bold beats strategy, is expected to increase the adjusted EBITDA margin to the near- and long-term targets of 20% (at some point in 2018) and 30%. Zynga remains excited about the World Poker Tour content planned for Poker in 2H:18. He (Gibeau) expects the global revenue mix, roughly two-thirds domestic at present, to skew more international in future years as Zynga makes headway in Asia on mobile. On the Q1:18 results call, Mr. Gibeau disclosed spending on ads in Asian markets where Zynga’s games have significant audiences.

Also in recent months, Zynga has disclosed that it has new CityVille and FarmVille games in development for mobile devices as the company attempts to reimagine its web successes for the larger opportunity on cell phones. Zynga previously disclosed that The Ville should enter soft launch later this year.

Each soft launch typically costs Zynga only a few million dollars as it prepares the titles for full launches in the western markets that have proven to be more lucrative for the company. Given the company’s disciplined cost structure, each forever franchise that is successfully introduced or reintroduced can become meaningfully additive to profitability.

Wedbush concluded by saying:

Zynga remains open to acquisitions as a source of growth in future periods. In 2017, it purchased Solitaire games from Harpan for roughly $42.5 million in cash and the casual card game division of Peak Games for $99.7 million in cash. Given the success of these transactions and relatively modest outlays, Zynga views “tuckin” acquisitions for around $100 million as its preferred M&A strategy at present.

Shares of Zynga were last seen up about 1% at $4.11, with a consensus analyst price target of $4.40 and a 52-week range of $3.20 to $4.34.