Is Zynga A Buy On The Pullback?

| About: Zynga (ZNGA)


Zynga shares have dropped massively this year, but this looks like a buying opportunity.

Zynga's mobile progress and investments in existing franchises will help it get better in the future.

Zynga, however, will need to overcome Glu Mobile's threat, which is making rapid moves in mobile.

Zynga has a strong balance sheet and its bottom line is expected to grow rapidly, making it a solid long-term pick.

The recruitment of Don Mattrick as Zynga (NASDAQ:ZNGA) CEO was supposed to turn around the company's prospects, but a look at the stock's performance so far this year indicates that not much has changed on the surface. Zynga shares are down more than 20% in 2014, and despite a poor performance, Zynga's board approved a massive pay package for Mattrick.

However, it cannot be denied that Mattrick has brought in some impressive changes, and Zynga's focus on mobile should allow it to do better going forward. The company is trying hard to establish its dominance in mobile, overcoming competition from the likes of Glu Mobile (NASDAQ:GLUU). But, will Zynga be able to succeed in its endeavor? Let's find out.

Improvement in the cards

Zynga's performance in the last reported first quarter was mixed, with revenue topping analysts' estimates. But, its losses were more than what the Street expected. The increase in losses was driven by restructuring costs, as Zynga is trying to remodel its business to focus on growth areas. As such, given the stock is trading close to its 52-week lows, it might turn out to be a good buy considering the moves that it is making.

The company is working hard on Farmville 2, which was one of its key growth drivers last quarter. In addition, Zynga's mobile games saw double-digit growth in the first quarter. In fact, for the first time in Zynga's history, its mobile bookings are expected to surpass web bookings this year. Zynga is already moving ahead impressively on this target, as its mobile bookings have grown to 36% of total bookings.

Zynga's move into mobile gaming is an impressive diversification strategy, which the company has pulled off very well so far and got a solid return.

Investments in franchises to drive growth

As already mentioned, Zynga is undergoing a restructuring phase. Consequently, Zynga will continue investing to grow its franchises and sustain their performance, especially its Casino and Words with Friends franchises. Its game development team is focused on providing an authentic Casino experience to users. The changes that it has made to the franchise have been received well by users, generating positive results in bookings and audience growth. In fact, Zynga's bookings grew around 10% on a sequential basis in the last quarter.

In another strategic move, Zynga acquired NaturalMotion to enhance its gaming portfolio. According to management, "We remain confident and excited in NaturalMotion's long-term future growth and impressive slate of proven hits, technology, tools and new games." Both companies are working together to develop NaturalMotion's racing and people franchises.

Zynga has made significant progress in its business this year. This can be understood from the fact that for the first time in two years, it delivered sequential growth across key performance areas such as bookings, adjusted EBITDA, mobile bookings mix, and audience. Going forward, it plans to deliver distinct and unique consumer experiences, which will differentiate Zynga from its competitors.

Recently, the company launched FarmVille 2: Country Escape in 16 languages across the iOS and Android platforms. Zynga's team incorporated some unique features in this game, which at present are not available elsewhere in the market. Some features, such as connected economy, allow players to link their mobile experiences to their FarmVille 2 web game. Its social control gives players more choices on how to connect with family and friends. Driven by such features, the game has seen more than 4 million installs since launch, receiving positive feedback from players.

The Glu Mobile threat

However, it should be kept in mind that Zynga is late to the mobile gaming party. There are established companies such as Glu Mobile that are strengthening their mobile portfolio. As I had mentioned in my previous article, Glu is making solid progress in mobile:

"Titles such as Deer Hunter and Eternity Warriors have gained solid traction and the company is looking to solidify its pipeline further.

It will be providing content updates to both Deer Hunter 2014 and Eternity Warriors 3 going forward. Glu has a strong line-up of new launches including Contract Killer 3, the Hercules theatrical titles, its first sports game, Tap Sports: Baseball, and Dino Hunter.

In addition, Motocross Meltdown is gaining traction with its target demographic, and is on track to exceed expectations due to an alignment of its core game play to consumer expectations. Frontline Commando 2 is also performing better than previous releases of the franchise."

In addition, Glu recently strengthened its portfolio by acquiring PlayFirst, which adds games such as Diner Dash to its stable. In fact, PlayFirst's games have aggregated more than 750 million downloads in the last 10 years. So, Glu looks like a threat for Zynga.

Fundamentals look good

Moreover, it looks like investor sentiment around Zynga is improving. The number of shares short at the end of May dropped to 58.47 million from 63.27 million in the prior month, according to latest data available from Yahoo Finance. In addition, Zynga has a strong balance sheet with no debt and $782 million in cash, which it can use for making acquisitions and investing in research and development. Finally, the company's bottom line is expected to increase at an annual rate of 30% for the next five years, which means that Zynga could be a solid growth pick. So, it would be wise for investors to make the most of Zynga's drop and buy more shares.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.