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Why Zynga's Acquisition of Peak May Help a Major Stock Breakout

Zynga Inc. (NASDAQ: ZNGA) stock has been stuck under $10 for almost its entire life. It turns out that the stay-at-home and work-from-home initiatives ironically have been a good development for the mobile video game maker. Even last week, rising above $9 represented a multiyear high. Now the company has announced an acquisition, and Zynga may finally be trying to break out above $10.

Zynga announced ahead of Monday’s open that the company has entered an agreement to purchase 100% of Peak, a Turkish mobile developer, for a sum of $1.8 billion. This compares to nearly a $9 billion market value of Zynga as a whole.

While the deal was shown to consist of roughly $900 million in cash and $900 million of Zynga common stock, it may not be as big of a hit to its books as it sounds. The new shares will be issued at a volume-weighted average closing price of roughly $7.92 per share over the 30-day trading period ended May 29.

This represents approximately 113.6 million new shares, or about 12% of outstanding shares. Zynga had roughly $1.26 billion in cash at the end of the first quarter of 2020, but it also carried $1.65 billion in goodwill and intangibles at the same time.

Zynga raised its guidance to reflect its strong performance quarter to date, but Zynga’s 2020 guidance left its assumptions alone for the second half of 2020. Effectively, they are not currently adding much contribution from Peak at this time. This is also three-years after Zynga purchased a casual card game from the same company for $100 million, and the new deal will add in “Toy Blast” and “Tune Blast” to the portfolio.

One consideration here about evaluating the acquisition is that analysts are so far not being cautious about it.

Wedbush Securities likes the deal and chooses to disregard Zynga’s 2020 guidance. The firm’s Michael Pachter reiterated an Outperform rating and raised his target price to $11.50 from $9.25. He also adjusted his estimates to reflect the acquisition closing on June 30 plus some contribution from Zynga’s new game pipeline. Their note said:

We are raising our 2021 estimates for bookings to $2,740 million from $1,950 million and for EBITDA to $585 million from $450 million. For 2022, we are raising our bookings estimate to $2,810 million from $2,250 million and our EBITDA estimate to $700 million from $510 million. Our new estimates contemplate virtually no contribution from any games beyond those already announced, so there may be significant upside to our estimates.

Another report highlighted that Peak has a higher influence and presence outside of the United States than Zynga. The firm also believes that this should be a positive for its margins while extending Zynga’s international scale and reach.

BofA Securities previously had an Underperform rating on the stock. The firm’s investment rationale indicated some caution, but that was ahead of the news. The firm cited its valuation being at a premium to its peers despite slower organic growth, and it noted that Zynga does not have a strong record of growth through new game development. It also had four more risks:

1) potential for a sharp deceleration in mobile advertising bookings,
2) tougher annual growth comps without more M&A,
3) greater multiple compression risk versus peers,
4) potential to lag the broader market in macro recovery.

Zynga has managed to rise on its own and even pass its consensus analyst price target of almost $8. Several calls were issued back in early May:

  • Morgan Stanley reiterated its Overweight rating and raised its price target to $8.25 from $7.75 on May 7.
  • Baird reiterated its Outperform rating and raised its target to $9 from $8.
  • Barclays maintained its Equal Weight rating but raised its target to $7.50 from $6 on May 7.
  • Credit Suisse reiterated its Underperform rating but still raised its target to $6 from $5.60 on May 7.

Zynga’s closing price was $9.15 on Friday, but the shares were last seen at $9.57, after hitting a new multiyear high of $9.65 earlier in the day.