Why Zynga Might Be Next To Have A Facebook-Like Rebound And Rise Back To $4

| About: Zynga (ZNGA)

Social networking and gaming stocks were a hot sector in early 2012, but after the highly-anticipated Facebook (NASDAQ:FB) IPO became a money-losing investment for many shareholders, the entire sector went from very hot to icy cold. Facebook shares hit a 52-week high of $45 per share shortly after going public at $38 per share, and hit bottom at $17.55 for a 52-week low, in late 2012. However, the stock has been mounting a serious rebound in recent weeks and it has nearly doubled off the 52-week low. This could mean that other stocks in this sector might also be poised for a major rally off of recent lows, and one stock that could be next to rally is Zynga, Inc. (NASDAQ:ZNGA). Here are a few reasons why it is time to take a fresh look at this stock and why it might be about to rebound:

1) Zynga has become a leader in social gaming and it offers some of the most popular games for mobile devices, which includes "Farmville" and "Mafia Wars". These games are also played online and through Facebook. While Zynga has some real hits, it needs to develop new games to keep players involved. That has been one concern for investors as it makes sense to question the sustainability and future of these games. However, it seems likely that Zynga will be able to develop or acquire new games in the future and remain a dominant force in this industry. That is because this company has a mountain of cash on the balance sheet which gives it the funds to develop new games or make promising acquisitions.

2) Zynga has a fortress-like balance sheet with about $1.32 billion in cash and just around $100 million in debt. The cash on the balance sheet is equivalent to about $1.69 per share. That is considerable since the stock is now trading around $2.60. If you back out the cash on the balance sheet, it is indicating that the patents, game portfolio, brand name and other assets are only being valued at about 80 cents per share. The stock is also trading for just a small premium to book value which is $2.38 per share. All these factors lead me to believe that this stock is way too cheap.

3) Zynga is taking steps to get into what might be an extremely profitable new business in the future... online real-money gambling. The company recently applied for a gaming license in Nevada. It also recently pre-launched two gaming websites called Zynga Plus Poker and Zynga Plus Casino for players in the United Kingdom and both sites are projected to go live in early 2013. It also has an exclusive partnership with Bwin.party which is a leading online gaming company. It seems that Zynga is getting into this lucrative industry outside of the United States where it is already legal. A likely strategy seems to be to get established in the United Kingdom and then use that experience to prepare for the possibility that online gaming will become legal in the United States in the next couple of years. The United States Government needs new revenues and when you consider that there is a trend of more acceptance towards everything from legalizing marijuana, and gay marriage, etc., it seems like online gaming might not be far off. Investors who buy into Zynga now might be getting a shot at investing in the next leader in online gambling. Just imagine playing Words with Friends for money in a couple years....and with real money involved, it's likely that Zynga will get an even bigger piece of the pie and rely less on advertising for revenues and profits.

This stock appears to have hit rock-bottom and it is still too cheap. At least one analyst thinks Zynga shares are worth much more than the current price. An analyst at Needham has a buy rating and a $4 price target on the shares. That could be the next level for these undervalued shares and it could still possibly have plenty of upside left if online gaming pays off in the future.

Here are some key points for ZNGA:
Current share price: $2.59
The 52 week range is $2.09 to $15.91
Earnings estimates for 2012: 3 cents per share
Earnings estimates for 2013: 1 cent per share
Annual dividend: n/a

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I am long ZNGA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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