For those following my thoughts on Zynga (NASDAQ:ZNGA), I have said in past articles that the stock is not a buy yet. The reason for this is not because I don't believe in the company long term, but because of where the stock price was.
On my last take (please consider: Why Zynga Is Still Not A Buy) Zynga was trading in the $3.50 range and correcting. Then out of nowhere, Reuters reported that the company was about to offer real-money online gambling and everyone became bid button happy and the stock jumped within two-three days above $3.50 once again.
However I warned in the comment section saying that this piece of news was baked in the cake because the market has knowledge of this news item and if the stock pops, it would be a selling opportunity.
Like I have said in previous articles, Zynga will not see a dime in U.S. gambling profits before the calendar year of 2015. That is, if all goes well and according to plan and no mistakes are made along the way. Also, I doubt if Zynga manages to make any money from this gambling venture with bwin for 2013. And when I say money, I mean enough money to actually mean something to the bottom line and not pennies and dimes.
And since the company has offered absolutely no guidance on the gambling business whatsoever, I don't think that investors should expect much at this particular moment.
Don't get me wrong, I have said all along that gambling is were Zynga will make most of its money in the future. However, it's too early to discount what will happen in 2015 in today's stock price. As a result, I have recommended selling the stock above the $3.50 level, recommending investors buy at lower levels. And the reason for is because I believe the stock will not do much before we get a little more feedback and guidance as per Zynga's gambling ventures.
What has changed today that has made me change my recommendation is nothing else than the price of the stock. Today stock is approaching the $3 level and I for one think that investors need to buy at current levels and be prepared to ride the wave over the next 12-18 months, as the company transforms from a pure social game company to a real money gambling company.
But there is another reason to buy the shares ahead of the company's earnings report in several days on Wednesday, April 24. According to Schaeffer's Investment Research, during the past 10 days, traders have bought to open 8.13 calls for every put on ZNGA. This is based on data from the International Securities Exchange, the CBOE and NASDAQ data.
This ratio arrives in the 82nd percentile of its annual range, confirming a stronger-than-usual skew toward bullish bets over bearish in recent weeks. In particular, Zynga's April 3.50 call has attracted a lot of attention lately, gaining more than 6,000 contracts in open interest over the past 10 days. This strike now carries total open interest of 32,497 contracts -- and most of these out-of-the-money calls were bought to open, pointing to expectations for a short-term rally from ZNGA.
So on the one hand current price levels offer long-term investors maximum return potential (as opposed to buying at $3.70 for example), and on the other hand, even if someone is thinking about a short-term trade, there is evidence to support such an outcome by the bullish short-term options activity.
Finally, investors buying at current levels enjoy a good margin of safety. Remember, Zynga's balance sheet has a very big pile of cash and the social gaming business is holding its own, even though the company is not really making money. This stock is not going to zero no matter what happens. The possibility for profit at current levels is much higher than the possibility of a loss.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.