Several months ago, I opened a new portfolio for the younger investor who has the funds and the discipline to invest in a very aggressive future retirement portfolio (read the investor profile here). The "Young and Restless" portfolio is specifically designed to enable the youthful investor to become rather wealthy in a relatively short period of time, which could create a very strong retirement portfolio in the near term.
What I have done was place some of the more popular stocks in today's world, into a "coulda, woulda, shoulda" portfolio, that when a younger investor looks back 5 years from now, they WON'T say that they could have, or would have, or should have, taken that aggressive approach when they were younger.
Not to nit-pick, but these companies are not just your average penny stock lottery tickets. Each has a track record, a solid business model, and has either been performing well already, or are on the verge of doing so with strong upside potential.
As of the last update (review this article), this portfolio was up about 168% on an annual basis, 2 months into the life of the portfolio. While I was told I was crazy, money talks and BS walks, and so far this portfolio could have made followers plenty of money.
Now We Are Adding Zynga
Zynga (ZNGA) was a "failed" IPO for investors who bought in at the beginning. It opened trading at around $10/share, hit a peak of just under $15/share, and had so many executives walk, one wondered if the company would survive a year. Nobody liked the CEO, and the deal that Zynga had with Facebook (FB) looked like a cash drain after the details began coming in.
The price of the stock began to drop continuously as investors fled along with many company executives. Even Mark Pincus, the CEO, sold off so many shares of his stock that I thought he might also abandon ship.
As you can see from the chart above, the stock fell into the low $2.00 range and was virtually written off. Much like some of the virtual "props" from some of their social media games, like Mafia Wars II, disappeared, I thought ZNGA would disappear.
Then a funny thing happened. Facebook decided to cut much of its business ties with Zynga, and dissolved their agreement. Facebook was now not going to get 1/3 of ZNGA profits and ZNGA could use any other platform it desired. I had some mixed emotions about the actions because quite frankly, how was Zynga going to attract 900 million potential players on its own?
As noted in the earnings call, Pincus outlined the company realignment that would stress their own independent platforms, as well as a mobile-first focus.
We made good progress in the quarter realigning the company around our best growth opportunities, and I want to highlight five actions that we took. First, at the beginning, in the third quarter, we realigned our company to a mobile-first focus. We ended the year with more of our new game teams focused on mobile than web.
With the incredible advances in smartphones and tablets, the mobile first focus is obviously going to be a game changer for the company. Especially if several of their more popular games begin to take off.
The truth is, that 3 of their most popular games are already the best out there. As Pincus noted:
Zynga's core strength has been our ability to invest in, and sustain, leading franchises. These games, like FarmVille, poker, and Words With Friends, have become lasting daily habits for millions of our players, generating significant revenues over long periods of time. Today, we're the only company with leading franchises in three of the top four social game categories.
There are currently 72 million mobile device players already. That to me bodes well for the future.
The Facebook Issue
In November 2012, Zynga and Facebook agreed to end their business relationship that gave the developer certain privileges but also limited where it could launch its games and how Facebook advertising appears on Zynga.com. That deal goes into effect in March this year.
Much to the surprise of investors everywhere, Zynga still grew revenues while on Facebook, and very soon, they will not have to pony up much money (as of March of this year). As noted in this article, 27 million users bought virtual goods which was an increase of 15 million users in 2011.
Without having to shell out 1/3 of the profits, Zynga can now plow that money right back into game and platform development as noted in the company conference call.
As noted in this report, Zynga and investors could benefit greatly from the new business relationship with Facebook, even if the announcement was not embraced at first.
"I do think it's a better deal (for Zynga), once you get past the fact that the relationship isn't as good as it once was," Needham & Co. analyst Sean McGowan said via email.
Under the new terms, Zynga has more leeway to make its games available on sites other than Facebook's, opening it up to more revenue opportunities - if it can develop more hit games.
While it is too early to delve into, the potential of real money gambling for the Zynga basket could make the entire company into a financial blockbuster. As more information on that front develops, I will certainly get into more specifics. For now it should be noted that David Ko, COO, stated this during the conference call:
We remain on track to deliver our first real money gaming products in the U.K. in the first half of 2013. Together with bwin.party, we'll offer poker and casino games under the Zynga Plus Casino and Zynga Plus Poker brands, and we'll be rolling out these products in multiple phases across a range of platforms in the U.K., namely via web, download, Facebook, and if we choose, mobile.
In addition, we filed an application for a preliminary finding of suitability with the Nevada Gaming Control Board in December, a small first step toward participating in the U.S. online real money gaming market. These are all steps that are moving us toward our long term vision in real money games.
If anyone doubts that this "full court press" into real money gaming is not about to transform the company, I suggest you read the very words from David Ko. To me, those 2 paragraphs says it all, for now.
If anyone has been wondering why the stock has almost doubled in less than 2 months, THAT could be the single biggest reason. If anyone would care to look back at a "Hail-Mary" pass that has been caught, check this out.
I won't brag until the cash starts rolling in, but THAT seems to have been a pretty good call.
The Basic Fundamentals Are Very Good As Well
Add to all of the above, a pretty decent balance sheet.
- Price to book value is only 1.45, which for a growth company is tiny.
- The company has about $1.3 billion in cash with only $100 million in debt. To me, that is debt free.
- Currently, there is only about 40% of outstanding shares being held by institutions. Plenty of room for them to hop on the band wagon.
- Almost 9% of outstanding shares are still held by insiders. Based on the potential I see here, I do not believe much more of the shares will be dumped carte' blanche.
- ESS rating is bearish to neutral. For a growth stock speculative play, with a shot at hitting it big, I even like the rating.
Based on the above opinions and facts, I will be adding Zynga to the Young and Restless aggressive retirement portfolio on the next trading day.