Zynga Inc. is traded on the NASDAQ under the symbol ZNGA and provides timely and trustworthy financial information. The ZNGA stock is a penny stock as defined by the Securities and Exchange Commission, trading under $5 per share. The stock is currently hovering around the $4 mark as of April 16, 2014. The company has a multi-billion dollar market capitalization making it one of the largest penny stocks. The company develops social games that are enjoyed by over 100 million monthly customers across the world. Zynga’s popular game titles include FarmVille, Words With Friends and Zynga Casino. Over 1 billion consumers have played Zynga games on a plethora of platforms like Facebook, Google Android and Apple’s iOS. The company’s headquarters is in San Francisco, California.
A Financially Stable Penny Stock
According to Yahoo Finance, Zynga has solid financial footing as the company is sitting on over $1 billion in cash. Yet the company has not recorded an annual profit. Zynga currently has a market capitalization of 3.52 billion, a PEG ratio (5 year) of 13.37 and a forward P/E of 80.20. Its profit margin is -4.24% and its operating margin is -6.35%. Annual revenues are $873.27 million and the company’s net income is -$36.98 million. Analysts rate Zynga with a mean recommendation of 3.0. They have a median target of 4 while pessimistic analysts have set a low target $3. The most optimistic analyst has set a high target of $7.
While investors point to the fact that Zynga holds $1 billion in cash, critics point out that the company’s fourth quarter revenue in 2013 dropped by 43% to $176 million. The daily active users and monthly active users are also significantly declining (51% and 62% respectively, compared to the previous year). However, revenues are projected to increase this year as well as in 2015. There is hope that Zynga will record a profit in 2014. It is important to note that many tech companies fail to record profits in their initial years, so the fact that Zynga has yet to get in the black is no reason to panic.
Stock Price Volatility
In 2012, Zynga’s stock sold at over $14. Many analysts are swooping in to buy now, at the very low $4 level because the company produces incredibly popular games and has a gigantic user base. Hedge fund billionaire, Steve Cohen, has led SAC Capital to boost its ownership of Zynga stock to 5.1%. The analyst firm Wedbush recently affirmed its “Buy” rating on Zynga and established a price target of $7. Morgan Stanley also upgraded the stock to “equal weight” status.
The past month has been a tumultuous one as the stock has dropped a little over 25% but analysts are fairly optimistic for the company’s long term outlook. The recent drop in the stock price is partly due to investors moving money to Zynga’s primary competitor, King Digital Entertainment (KING), which makes the uber popular Candy Crush game.
The stock has stabilized since new CEO Don Mattrick took over in July of 2013. Since then several executive suite personnel have been replaced. This has led to Wall Street having more confidence in management and the questions regarding the founder’s (Mark Pincus) ability to lead Zynga are a now in the rear view mirror.
There is hope that Zynga’s new titles FarmVille 2, Country Escape, New Zynga Poker and New Words With Friends will lead the company into the black. Yet the public is very fickle when it comes to gaming. FarmVille and Words With Friends were monumental hits but Candy Crush emerged and took much of the market share. Analysts are neither overly optimistic or pessimistic on the stock. Their opinions are as follows: 18 hold recommendations, 1 strong buy, 1 buy and 4 underperforms. So, investors hold mixed opinions as to whether Zynga will be able to rebound and reclaim the attention of social gamers.
Zynga makes its money predominately from in-game purchases. Yet these revenues come from only about 2% of each month’s unique players. Critics argue that the company has to reform its business model to become profitable. Suggestions include charging users fees to play the games and selling in-game advertising space. Yet Zynga’s games are incredibly popular on Facebook and initiating such fees and advertising through the Facebook platform would likely be challenging.
Stock market analysts point to Zynga’s potential for growth due to its social casino games, especially Zynga Poker. Casino oriented mobile games are very lucrative and Zynga’s top competitor, KING, doesn’t have a foothold in that niche. Zynga is hard at work to make its Zynga Poker game as mobile friendly as possible. It currently brings in 10 million active users. Zynga Poker accounted for 21% of the company’s fourth quarter revenues in 2013. Overall, three fifths of the fourth quarter revenue is attributed to only three games: Zynga Poker, Farmville and Farmville 2. As long as Zynga maintains a high customer retention rate with these hit titles, the company’s stock has the potential to move towards the $7 mark.
Zynga’s acquisition of NaturalMotion, a mobile game developer based in Oxford, England, has also been deemed to be a success. It cost $527 million but it allowed Zynga to inherit NaturalMotion’s breakthrough animation engine technology as well as the wildly popular CSR Racing and Clumsy Ninja titles. The manner in which Zynga builds on this technology will be a primary factor in the company’s future successes or failures. If the technology allows Zynga to expand its operations into the video game console market, then there is the potential for exponential growth. If Zynga decides to stick primarily to Facebook and social platforms then the sock might continue to stagnate.
Zynga’s stock is a NASDAQ penny stock and therefore has many of the attributes which provide financial stability and company information transparency. However, it currently trades under $5 and well below its IPO price. Questions about growth, increasing competition and dependency on Facebook remain. However, this may be a good time to buy a financially stable penny stock.