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Summary

  • While these shares are still a gamble on the basis that Zynga is still unprofitable, there is an equal amount of risk in not taking a position here.
  • In twelve months, I expect Zynga to trade above $10 on the assumption that it is granted U.S. incense for online gambling.
  • In the near term (6 to 12 months), I see $1.50 upside on the basis of growing users and management's monetization initiatives.

"Don't play games with your money" is a constant reminder in the world of investing. And when you throw in the caveat of "gambling" to distinguish between value and growth, very few companies encompass these diverging ideals more than Zynga (NASDAQ:ZNGA), which has struggled to prove that is has a long-term sustainable business.

While the social gaming company, which offers free-to-play games, continue to grow in popularity, Zynga management has not shown that they can monetize their growth. This is even with the advantages present by Zynga's partnership with Facebook (NASDAQ:FB). But things look like they're about to take a turn for the better - albeit not right away.

There is talk that Zynga will be exploring online gambling. But that should surprise no one. Zynga has already leveraged its partnership with Facebook to offer online poker in the United Kingdom, where real money is on the line. Zynga currently has license in the U.K. to operate that business. And by all account, it's proven very successful. With analysts projecting that revenue for online gambling to continue to grow here in the U.S., investors are beginning to wonder if now is the time to place a bet on Zynga. The answer is yes.

Like legalized marijuana, it's only a matter of time before more states adopt gambling, which already occurs in several popular sports like pro and college football. And if you ever have the chance to take a trip to Las Vegas, hotels and palaces are being built because of the growing tourism business that Vegas enjoys. And people go their (partly) to gamble.

From my vantage point, when (not if) online gambling becomes adopted in the U.S., there isn't another company better positioned to capitalize on this eventual boom than Zynga, especially with poker.

On Wednesday, the company's management is certain to be asked about these ambitions once the company reports its first-quarter earnings results. Analyst have modeled for a narrower-than-expected loss of 1 cent per share, which will improve over last year's loss of 3 cents per share. For the fiscal year, analysts are expecting a loss of 4 cents per share.

In terms of revenue, analysts project a drop of 36% year-over-year to $146.5 million for the quarter. Last year, Zynga posted revenue of $263.6 million. For the full year, revenue is projected to come in at $783 million.

As I've said, these numbers are not going to excite value investors. So I'm not suggesting that investors without a strong risk threshold take a position here. But Zynga should be able to grow your "play money" over the next twelve months.

Management has come under fire recently. But to their credit, they have also worked some miracles to get the stock to advance more than 80% over the past couple of years. But investors and analysts will demand improvement in the monetization metrics. That's the only way to assure investors that this stock is more than a gamble.

To that end, management will need to show strong daily active users and monthly active users. Next, the company has to show growth in areas like average bookings per daily active user, or ABPU. This is the number that explains the company's ability to monetize users through advertising as well as in-app purchases. So far the company has been doing well in terms of ABPU, including a 20% year-over-year surge in the January quarter. To what extent management can maintain this momentum remains to be seen.

While these shares are still a gamble on the basis that Zynga is still unprofitable, there is an equal amount of risk in not taking a position here. With the stock trading at $4.50, I would be a buyer here ahead of earnings. In twelve months, I expect Zynga to trade above $10 on the assumption that the company will be granted a license for online gambling in the U.S. In the near term (6 to 12 months), I see $1.50 upside on the basis of growing users and management's monetization initiatives.

Source: Why Zynga Is Worth The Gamble Towards $6