Can Zynga Pull A Groupon?

| About: Zynga (ZNGA)

Late last year one time social media darling, Groupon (NASDAQ:GRPN), was left for dead. The shares that IPO'd in late 2011 and sold for over $30 a share soon thereafter, were selling for less than $3 a share. Investors had given up on the company and most thought its business model would march it right into bankruptcy.

However, the company ended up confounding its skeptics. It named a new CEO, tweaked its business model, laid off employees and righted the ship. The shares are up more than 400% since its lows late last year and the company is once again in the good graces of its shareholders.

I believe Znyga (NASDAQ:ZNGA) might be following the same path as Groupon. The stock is certainly following a similar trajectory to Groupon. After soaring past $14 a share soon after its IPO in early 2012, the stock fell to ~$2 a share by late last year. The stock is up some 15% since I last profiled it in February but if it can follow Groupon's lead much higher prices may be ahead for patient shareholders.

The company has laid off a significant number of employees. More importantly it brought in well regarded Don Mattrick as CEO. Mr. Mattrick was Xbox division chief for Microsoft (NASDAQ:MSFT) and a former Electronic Arts studios head. The new CEO has already overhauled the company into three different divisions and got rid of many of the Zynga's previous executives who were present for the decline of the company's business and stock price.

The road ahead is hardly without landmines. However, the company has some assets that could help it survive. First and foremost it has over $1B of net cash on the balance sheet. In addition, its real estate is worth at least 10% of its current market value. The company has done a horrid job managing the transition to the mobile space but hopefully the new streamlined organization will start to make progress in addressing that gap.

The company is tracking to post a small earnings per share loss this fiscal year and that is the consensus for FY2014 as well. Revenues are running to slightly more than $700mm this year. The stock is selling near the bottom of its historical valuation range based on P/S and P/B.

The new CEO was able to increase the Xbox 360 base by over 600% and integrate Kinect technology and Netflix (NASDAQ:NFLX) into the console during his tenure at Microsoft. Given the new leader's history of success and the company's cash and real estate holdings, I think Zynga is a solid speculative high risk/high reward play. It has followed Groupon's path very eerily up to this point, I am willing to place a small bet that the company can continue along Groupon's trajectory and greatly reward shareholders. SPECULATIVE BUY

Disclosure: I am long ZNGA. 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.