Zynga Inc. (ZNGA) and LinkedIn Corp (LNKD) are two highly debated, watched Internet technology stocks with high trading volume, which had recently received updated calls from analysts. Both stocks will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
ZNGA was up 2.06% and closed at $3.42 on March 22, 2013. ZNGA had been trading in the range of $2.09-$13.55 in the past 52 weeks. ZNGA has a market cap of $2.70B. With the recent pullback, ZNGA may present a short-term buying opportunity for investors with strong risk tolerance.
Recent Analysts' Calls
On March 22, 2013, CLSA initiated a new coverage with an underperform rating and a target price of $3.50 on ZNGA. On March 20, 2013, BofA/Merrill Lynch downgraded ZNGA from buy to neutral based on its valuation, following a significant run in the stock. Analyst Justin Post said the stock already reflects potential value from its games and cautioned about risk from new competitive real-money poker launches. Post said,
The only driver of meaningful earnings surprise in 2013, in our view, is with a hit new social PC game, which is unlikely and difficult to predict.
Analysts currently have a mean target price of $3.84, suggesting 12.28% upside potential. Analysts, on average, are estimating an EPS of -$0.04 with revenue of $222.46M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of -$0.05 with revenue of $956.10M, which is 16.70% lower than 2012. For 2013, analysts are predicting an EPS of -$0.01 with revenue of $1.03B, which is 8.10% higher than 2013.
On March 21, 2013, ZNGA re-launched its website, allowing users to play its games without first signing on to Facebook (FB). As ZNGA continues to seek independence, Zynga's players will benefit as they no longer need to tie their player names to their Facebook accounts as a must. As quoted from the report,
Rather than relying on Facebook's communications features, Zynga has focused on building out features of its own such as its "social stream," a bar that is displayed within games to connect players to each other.
There are a few positive factors for ZNGA:
- Lower P/B and P/S of 1.5 and 2.0 (vs. the industry averages of 4.0 and 5.8)
- ZNGA has a healthy balance sheet ($1.28B total cash and $100M total debt) with a book value of $2.34 per share
- ZNGA increased its share buyback plan ($200M) in October, 2012.
- ZNGA has been expanding into real-money gambling and started to run real-money gambling games in Nevada since late 2012
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend; however, the MACD difference seems to be stabilizing in the last two trading days. The momentum indicator, RSI (14), is currently near neutral at 51.04. ZNGA is currently trading above its 50-day MA of $3.11 and 200-day MA of $3.24. The next resistance is $3.91, the R1 pivot point, followed by $4.43, the R2 pivot point, as seen from the chart below.
How to Invest
With the recent pullback, bullish investors may step in again. It is important to watch the key supporting levels at $3.24 (200-day MA) and $3.11 (50-day MA). For investors who would like to acquire ZNGA shares at a lower price or to gain some upside credit premium, a credit put option spread of June 22, 2013 $2.50/$3.00 put can be reviewed.
LNKD was up 3.68% and closed at $181.48 on March 22, 2013. LNKD had been trading in the range of $88-$184.15 in the past 52 weeks. LNKD has a market cap of $19.72B. LNKD continues to go up with its amazing story of growth. However, over valuation remains a short-term concern.
On March 21, 2013, RBC Capital initiated coverage on LNKD with a sector perform and a price target of $190.00. Analysts currently have a mean target price of $169.90, which is 6.38% lower than the current trading price. Analysts are estimating an EPS of $0.30 with revenue of $316.10M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.34 with revenue of $1.49B, which is 53.40% higher than 2012.
Fundamentally, LNKD's P/E of 1000 (vs. the industry average of 28.2) and Forward P/E of 96.2 (vs. the S&P 500's average of 13.9) are hard to evaluate. However, estimated 61.33% annual EPS growth for the next 5 years is one of the very few rare stories. Although LNKD has a healthy balance sheet ($749.55M total cash and zero total debt) with an operating cash flow of $267.07M (levered free cash flow of $144.18), LNKD's performance will mainly be tied to its growth.
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend, but the MACD difference continues to converge. RSI (14) is picking up and indicating a strong buying momentum at 71.49, where above 70 is considered as over-bought. LNKD is currently trading above its 50-day MA of $149.62 and 200-day MA of $118.60. The next resistance is $184.66, the R1 pivot point, followed by $201.14, the R2 pivot point, as seen from the chart below.
How to Invest
With expected 15.1 percent increase in 2013 for digital ad spending, the outlook remains optimistic for LNKD. However, LNKD is only 1.45% away from its 52 week high and is currently trading above analysts' target prices. LNKD's growth remains an amazing story, but its growth comes at a high price (P/FCF of 233.90). There may be more upside potential; however, the author will remain on the side-line for this one. Downside risk is outweighing upside potential as LNKD continues to rush higher. Investors can also review the following ETFs to gain exposure to LNKD:
- Social Media Index ETF(SOCL), 10.03% weighting
- Large-Cap Growth Equity Strategy Fund (RWG), 3.72% weighting
Note: All prices are quoted from the closing of March 22, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions. ZNGA and LNKD are not suitable for conservative investors.
Additional disclosure: May initiate a long position in ZNGA