- Zynga’s mobile initiative is gaining steam.
- NaturalMotion’s acquisition will be beneficial for Zynga in the long run.
- Zynga’s strong balance sheet and increasing institutional ownership are plus points.
The arrival of Don Mattrick as Zynga (NASDAQ:ZNGA) CEO has heralded a new chapter in the company's turnaround. Zynga's shares are up more than 40% this year, as it has been making some solid moves to grow its business. Zynga is tapping the casino category and mobile to generate growth, and Wall Street has appreciated its moves so far. Let's take a look at the company's different strategies and see if it is a good investment.
Zynga management is focusing on three key areas to grow its business. First, how it grows and sustains hits that consumers have validated over multiple years. Second, how it enhances its capabilities to create new hits, and finally, how it does both of the above in a more efficient manner. A look at its fourth-quarter performance shows that investments in its core business are beginning to show results, particularly in its "Words with Friends" and "Casino" franchises.
In Q4, its Casino franchise achieved sequential quarterly growth in bookings. Zynga has stabilized its revenue in its flagship "Poker" product by taking decisive actions to combat fraud and create a more trusted, higher-quality consumer experience. This progress yielded an 8% sequential audience growth for Poker mobile.
Slots is one of the fastest-growing segments in the casino category, and Zynga is delivering more new games to meet the demand of this highly-engaged community. It plans to launch its latest mobile slots product, "Riches of Olympus", to global audiences.
The outlook for Zynga, excluding NaturalMotion, is expected to be strong in Q1. For Q1, bookings are expected to be in the range of $130 million to $140 million. There is a high expectation of achieving sequential growth in each successive quarter throughout 2014. Further, the diversification of its cross-platform revenue mix is expected to show substantial improvements for the remainder of the year across audiences, bookings, and adjusted EBITDA.
The mobile shift
Strong organic growth illustrated by increased expected bookings, excluding NaturalMotion, reflects Zynga's focus on growing and sustaining top franchises, creating new hits, reducing costs, and growing on mobile. There's a major shift in its content pipeline from franchise to growth in mobile screens as more focus is on achieving this goal.
In terms of franchises, it plans to bring FarmVille to mobile in the second quarter. This new launch is expected to appeal to more than 400 million people around the globe, who played its FarmVille franchise on Facebook.
There is a significant shift in consumers' gaming habits, with bookings from the mobile platform expected to account for more than 50% of Zynga's bookings base in 2014. In the new product pipeline, 75% of all new games in development are mobile-first to cater to this shift.
Also, Zynga has sharpened its focus on running over 30 live services, and has allocated time and resources to create several new products. This displays its ability to learn valuable customer insights and think about how it can differentiate its offerings relative to competitors. It plans to move aggressively into new genres that align with timeless entertainment categories that consumers care about.
Also, the acquisition of NaturalMotion will allow Zynga to significantly accelerate its growth trajectory. By acquiring NaturalMotion, Zynga can significantly expand its creative pipeline, accelerate its mobile growth, and bring next-generation technology and tools to Zynga that will fast-track its ability to deliver more hit games.
Comparing the games played on consoles to those played on mobile, the mobile market is underdeveloped, with racing at a nascent stage as measured by the number of players participating, positioning Zynga to build category leadership in racing. It is dedicated on innovating to create extreme graphics combined with engaging mobile-specific game design that maximizes customer experience on handheld devices. Zynga is committed to nurturing and growing CSR Racing and Clumsy Ninja, and believes it can create even stronger consumer traction by leveraging another of Zynga's greatest strengths; live game operations at scale.
From day one, Zynga's new CEO, Don Mattrick, has made his intentions clear about migrating Zynga towards mobile gaming. In the recent Morgan Stanley tech conference, Zynga announced that it will be launching new mobile versions of its famous franchisees like Words With Friends, Zynga Poker, and FarmVille. Also, Mattrick also claimed that Zynga is preparing to launch pilot programs for its real-money poker game in numerous parts of the world. Zynga's shares popped as much as 10% in the wake of these statements. This news probably excited the investors, who were disappointed by the fact that Mattrick had claimed to not pursue real money gambling in mid-2013.
A vote of confidence
In addition, institutional ownership has also gone up, as Soros Funds disclosed that it had bought two million Zynga shares worth $7.6 million. This isn't going to make a huge difference, but is a big vote of confidence in Zynga. The company's strong balance sheet is also a plus point which investors should take into account before investing. The company has $1.2 billion in cash and marketable securities, and operating expenses have come down 26% since Mattrick took over. Additionally, Zynga also has a high gross profit margin of 84.8%, and is debt-free.
Looking at 2014 and beyond, Zynga seems to have the right strategy in place to win by delivering popular games and grow and sustain its franchises. The company has come out of a rough phase and looks set to scale new heights, making it a solid long-term investment.
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.