Why Zynga Is Back in Favor on Wall Street

Investors have a love-hate relationship with low-priced stocks. When a stock is under $5 or $10, investors can buy more shares and feel like they might be getting leverage if the upside story plays out. Then again, having a low share price also might imply that a stock hasn’t performed well for years.

In the case of Zynga Inc. (NASDAQ: ZNGA), it has been under $10 per share since 2012, after a $9.50 IPO price back in 2011. And the reality is that Zynga has been under $5 for most of the time since 2012. What if Zynga’s fortune is changing?

It has taken years for Zynga to get past the shadow of losing Facebook as its key growth driver. But under Frank Gibeau (a former Electronic Arts executive), after replacing Mark Pincus as CEO, Zynga may finally be back on track.

In the latest quarter, which sent shares to multiyear highs initially, Zynga’s revenues of $265 million were $25 million higher than its prior guidance. The results were also enough for Zynga to raise its 2019 annual revenue target to about $1.2 billion. Some of that growth is coming from game titles that are based on hits such as Game of Thrones, Star Wars and Harry Potter, and Zynga’s revenues are almost all derived from mobile use now.

One of the biggest drivers for Zynga in 2019 was an odd analyst call at the end of January. Goldman Sachs started shares of the mobile games-maker with a Buy rating and assigned a $5.30 price target. Goldman Sachs is better known for focusing on larger and more prominent companies. Zynga shares were at $4.50 ahead of that call, with a then-consensus target price of $4.68.

Zynga initially was indicated to open up about 12% at $6.17 early on Thursday morning and its shares opened up at $6.23. It may seem disappointing that Zynga sold off to have a gain of “only” 6% with shares at $5.84, but the prior 52-week high had been $5.78.

A lot of investors may be taking profits in Zynga now, but many low-priced stock investors will be paying close attention here in the coming weeks and months to see if the stock has it in its power to get back up even higher.

Wedbush Securities reiterated its Outperform rating and raised the price target to $7.50 from $6.40 after the earnings report. The firm noted that new acquisitions are not appearing to act as a drag on emerging profitability after first-quarter results handily beat guidance and expectations with strength across its core franchises. And ahead of earnings, Wedbush had even projected that Zynga likely would remain conservative with its guidance.

Some other analysts had something to say about Zynga:

  • Robert W. Baird raised the stock to Outperform and lifted the $5.00 target price to $8.00.
  • KeyBanc Capital Markets reiterated it as Overweight and raised its target to $7.00 from $6.50.
  • Piper Jaffray reiterated its Overweight rating and raised its target to $7.25 from $6.00.
  • Benchmark reiterated its Buy rating and raised its price target to $8.00 from $5.00.
  • Jefferies also reiterated its Buy rating, raising its target price to $7.00 from $5.00.
  • Stephens maintained its Equal Weight rating, but it did raise its target to $6.50 from $5.25.

Investors may have had their heads turn when Zynga reported a wider net loss. The company’s report clarified this on acquisitions:

We finished Q1 with a net loss of $129 million, versus our guidance for a net loss of $59 million. The greater net loss versus guidance was primarily driven by the outperformance of our recent acquisitions. Specifically, Merge Dragons! and Empires & Puzzles are performing well ahead of our expectations and as a result, we recorded an $86 million increase in the contingent consideration for the acquisitions versus our guidance of a $10 million increase… Our Adjusted EBITDA was a loss of $19 million, better than our guidance by $10 million and a decrease of $45 million year-over-year.

As of March 31, 2019, Zynga’s cash, and combined investments was at $252 million, and the company had $100 million of debt outstanding on its $200 million revolving credit facility.

In the second half of 2019, Zynga expects to launch new titles such as Game of Thrones Slots Casino, a social casino experience based on the cable-TV series, and Puzzle Combat, a new Small Giant Games title that is said to combine modern combat role-playing themes and match-3 game elements. On a longer-term view, Zynga said:

We have an exciting new game pipeline that includes titles based on existing and new IPs such as FarmVille, CityVille and Puzzle Combat, as well as strategic licenses such as Game of Thrones, Harry Potter and Star Wars. These new titles are built within our global studio organization by teams that have been together for years and have a proven track record of developing successful games. We maintain a rigorous approach to engineering hits, which includes careful testing during soft launch and relentless iteration with the goal of delivering long-term player engagement. We currently have two new games in soft launch, Game of Thrones Slots Casino and Puzzle Combat, with more to come over the coming quarters.

As for what will be considered a success for the post-earnings reaction, Zynga likely needs to close above the $5.78, the prior 52-week high, and then stay above that level, for newer investors too not worry that the best of Zynga’s recovery has been seen.

Zynga’s 50 million shares that had traded hands by 11:40 am Eastern Time was already about three times the normal volume of an average trading day. This will have been the most active trading day since Zynga traded 65 million shares back on October 9, 2018.

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