Zynga (NASDAQ:ZNGA) is on fire! Stock is up 9.5% in the past 5 days. I believe that more than one hedge fund has opened a bullish position in the past week, causing demand to increase all of a sudden. For example, a regulatory filing from hedge fund Jana Partners showed today revealed that the fund bought more than 25 million shares during the first quarter. Immediately after the announcement, the laws of supply and demand set in motion. Bullish investors piggy backing on the research and due diligence carried out by Jana Partners are buying shares like there is no tomorrow, causing today's stock price to rise 6.30% so far.
But the most interesting part of the story is yet to come: What are the 25 million reasons that caused Jana Partners to invest in Zynga?
We can be sure that Jana Partners has not made its investment decision based on the "strong" fundamentals of Zynga. It is a well-known fact that the firm is not able to be consistently profitable.
The strategy of Jana Partners is event-driven. According to their website, they are a value-oriented investment advisor specializing in event-driven investing exclusively for qualified investors. This confirms my original thesis about Zynga: although from a value perspective this stock is to be avoided, some key events scheduled for this year could make the stock price easily surpass the $4 per share level. Furthermore, the company is committed to do whatever it takes in order to successfully finish its transition from a Farmville company towards a mobile & gambling company.
Last week, in Zynga: A Catalyst Is On Its Way, I wrote that the launch of the Facebook (NASDAQ:FB) version of Zynga's U.K. gambling sites is a major catalyst. This is not only because Zynga's stock price historically tends to be highly sensitive to product releases, but also because it will be the first time a company takes the concept of social gambling through Facebook to its maximum expression: dozens of real money games released in a single day. The bullish position that Jana Partners opened last quarter confirms that I'm not the only one with a similar bullish thesis.
Zynga is showing commitment to achieve profitability
There is another reason to be bullish. The company is releasing a new title every 3 weeks. Some of them look very promising. This is amazing, considering the fact that Zynga closed offices, fired people and erased over 10 games in the past year. There are less engineers and product managers working there, yet the quality and concept of each game released in the past weeks is outstanding. This shows, to say the least, commitment to succeed. It also shows that the new portfolio of games will be much more Facebook independent, mobile oriented and diversified than before.
Game releases are a "hit or miss" business. The more applications you release, the higher your chances are of developing a great game. In this sense, I believe that if Zynga continues the current rhythm, they will eventually release the next big thing in the iTunes & Google Play & Facebook Store. It's a matter of time.
Analysis of Zynga's main products (May 15th)
|Bull says||Bear says|
|Farmville 2 (Platform: FB and Zynga.com)||Launched only 6 months ago, the game attracts as much as 8 million players a day. Top rated game on FB platform.||The company is having trouble with the mobile version, a market far more promising than Facebook web platform.|
|Games of Thrones: Ascent (to be released)||Games of Thrones is a popular television show. The last season had 5.3 million viewers. Also, the game is expected to be very social.||Low margins. Even if the game is a hit, Zynga will need to pay royalties to Facebook, HBO and Disruptor Beam.|
|Running with Friends (launched on May 9th)||Endless running games can be hits, as Temple Run (developed by a small studio) shows. Furthermore, the title is a freemium. If Zynga makes a vicious loop here, it can sell some coins and improve the revenues of next quarter.||Many app developers tried to copy the success of Temple Run without impressive results.|
|Draw Something 2 (released 2 weeks ago)||The previous version was a massive success. At its peak, it achieved a MAU of 36 million users.||Many users have already either uninstalled or forgotten the game. Zynga paid $180M to buy the app last year. They could never recover the premium.|
|War of the Fallen (card game released 1 month ago)||This game introduces a new social feature called Guild Force: it unites a player with friends, making the game more social and probably keeping a high level of user engagement. Also bear in mind that Zynga has a good know-how about card games, after developing Ayakashi: Ghost Guild in late 2012.|
|Zynga Poker||This is the world's largest free-to-play online poker game and one of the strongest brands the firm currently has. It is the fourth biggest Facebook app in terms of MAU (10,000,000+), according to AppData.||The game uses virtual currency.|
|Zynga & Bwin.party (OTCPK:PYGMF) U.K. gaming websites||This is the first attempt of Zynga to introduce a real money gambling product. Furthermore, they have launched the site in the U.K., a place famous for passionate gamblers. Bwin.party has years of experience in this field. Dozens of different games and slots.||The games do not take social mechanics to its maximum expression. There is no Facebook version so far. U.S. regulation (see Nevada issue) restricts online gambling.|
Rate: Buy / from Buy
Investment Horizon: one to three months