As a regular (ZNGA) writer and enthusiast, the day we have all been waiting for has finally arrived. It was announced today that Zynga will be launching its online real money gambling products this week in the U.K. With Zynga trading down 25% from its highs in mid March of $4, it is time to ride the next wave higher.
Why it is time to buy
Zynga has once again released another hit game, What's The Phrase, which is now ranked in the top 10 apps in the app store. The fact that Zynga is still capable of producing top games while closing down all its non-profitable studios will continue to help Zynga's bottom line. With Draw Something 2 also in the works, it appears Zynga's social gaming business is finally hitting stride.
With rumors now swirling that Zynga Poker & Zynga Casino will be launching its real money gambling in the U.K. later this week, it is a great time to get in and ride the next wave higher. Zynga has started to rally after hours today after the news came out and the stock should be able to carry this momentum and send it back into an uptrend. With other competitors currently out there in the real money gambling arena, I feel Zynga has a niche in this space of being able to target a whole new customer base of "social gamblers."
Other companies like 888 (GM:EIHDF), bring in revenues of $375 million a year, as it focuses solely on online gambling. From a very passive estimate, Zynga Poker could bring in at least 2-3 times that revenue. With Zynga Poker averaging just over 100,000 active users, compared to 888 Poker's mere 3000 active users, it shows the potential for Zynga in this space. If Zynga is able to convert just 10% of its active players to real money players, it will become the second largest real money poker site in the world behind Pokerstars. The problem for Pokerstars is it will be banned from entering the USA markets for 5 years, which gives Zynga yet another edge. If Zynga can convert as little as 1 in 10 players from social gaming to social gambling, it will be capable of bringing in over 1 billion in revenues a year.
Zynga has been able to maintain huge cash piles of $1.32 billion, which is equivalent to $1.69 per share. With Zynga closing at 3.07 at market close, it is trading extremely close to cash value never mind actual enterprise value. With the news coming out after the markets closed about Zynga's real money gambling products launching this week, the stock started to gain traction and Zynga has now broke back above its 200-day moving average in after hours trading. Breaking back above the 200MA should provide Zynga positive upward momentum and should allow Zynga to reverse the current trend and start to head higher and retest the highs in the $3.80s to $4 range. The relative strength index (RSI) has also been a very accurate indicator for Zynga's stock lately, and with the RSI reaching 38, Zynga is now entering extremely oversold territory. As shown in the chart (circled in green), in the past, when Zynga reaches the upper end of the RSI or the lower end of the RSI, it tends to reverse the current trend.
With Zynga cutting down on operating costs and still producing hit games, and with real money gambling products expected to launch this week, I feel there could not be a better time to buy. As well, it is important to consider that Zynga is currently trading down near $3, which is down 25% from March highs. The news just broke after markets closed today and should be able to provide Zynga some momentum and buyers to push it higher the next few weeks.