Zynga: Worth a Play?

Zynga (ZNGA) is an industry-leading provider of social game services.

The company produces, markets, and utilizes mobile games as live services played on platforms such as iOS and Android, and social networking platforms (e.g., Facebook (FB)), among others.

Zynga operates a free-to-play business model, with the company generating the bulk of its revenues via in-game microtransactions (online game revenue) and advertising services (advertising revenue).

Zynga has been expanding its game portfolio for quite some time now, constantly growing revenues and bookings.

Shares have followed revenue growth, climbing higher over the past few years. However, the stock has slipped lower substantially since mid-summer. The stock is currently hovering 48.3% lower from its 52-week high of $12.32.

On the one hand, the mobile gaming industry is brutally competitive. On the other Zynga has a proven, solid track record of growing its financials. Following the continuous share decline, I believe shares are trading at an attractive valuation considering the company’s growing profitability and rich margins. For this reason, I am bullish on the stock.

Recent Results, Bookings

Zynga’s Q3 results marked another outstanding quarter in terms of growth. The company posted the highest quarterly revenue in its history, while bookings remained near record levels.

Revenue remained at record levels, coming in at $705 million, up 40.2% year-over-year, while bookings were the highest the company has seen in any Q3, reaching $668 million, up 6% versus the prior-year period.

Bookings growth remaining strong illustrates the commitment of customers (e.g., advertisers) to spend money with Zynga. Hence, Zynga’s revenue growth is likely to remain robust, going forward.

To understand bookings, think of it as a contract with a customer who has signed but hasn’t yet utilized the service nor paid Zynga. For instance, let’s assume a customer signs up for a 12-month deal to advertise on Zynga’s games, that amounts to around $200 a month at the start of Q3. Because the said customer is committed to spending $1,200 on the company’s games, Zynga will recognize $2,400 in bookings but only $600 in revenues for Q3. Total bookings, thus, amount to total revenues adjusted for change in deferred revenues (cash not yet collected, but expected), which stems from selling virtual items.

Profitability, Valuation

Powered by Zynga’s asset-light, digital business model scalability, the company’s gross margins are quite juicy. They stood at 65.8% in Q3, up 100bps sequentially.

The bottom line remained in the red, as the been the case over the past few years. However, note that the company records high depreciation and amortization levels and high stock-based compensation expenses (non-cash items). In fact, the company has generated operating cash flows of $301 million over the past four quarters, when adjusted for these items.

However, GAAP profitability seems to be nearing too. Zynga guided for an adjusted EBITDA of $615 million for FY2021, up from its previous guidance of $575 million for the year. The company is expected to post EPS of (0.09) for the year too, which likely points towards a positive bottom line in its upcoming earnings through 2022.

The stock is currently trading at 2.55 times management’s FY2021 $2.78 billion revenue estimate, which I find quite attractive, considering its continued growth and possible profits next year.

Wall Street’s Take

Turning to Wall Street, Zynga has a Strong Buy consensus rating, based on 12 Buys and one Hold assigned in the past three months. At $10.58, Zynga’s price target implies 64.16% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.