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Summary

  • Zynga disappointed the market with low booking guidance.
  • A couple of new partnerships provide upside potential.
  • A prime example exists of why delaying games can be good.

The original headlines from the Q214 earnings report for Zynga (NASDAQ:ZNGA) had the investor community fearful. Bookings missed estimates and guidance was absolutely horrible. After reading the quarterly report and the earnings call transcript those statements of drastically lower guidance were quickly replaced with interest for buying the stock around 52-week lows.

Zynga remains a turnaround after hiring Don Mattrick away from leading Xbox at Microsoft (NASDAQ:MSFT) roughly a year ago. What were initially fears of drastically underperforming games turned to a realization that the company was delaying major mobile updates of top franchises into later this year. While the market originally fretted over this move, one needs to be reminded that Glu Mobile (NASDAQ:GLUU) made a similar move in the middle of 2013 and it has worked out positive for them.

Decent Results, Disappointing Guidance

Generally the Q214 metrics were all inline with expectations with bookings hitting the very low-end of forecasts. Earnings per share were actually inline with expectations due to cost controls. For investors interested in reviewing the other metrics, please review some of the other articles published on Seeking Alpha.

The issue hurting the stock on Friday was the guidance for full-year bookings plunged due to the delays in releasing the mobile versions of Words with Friends and Zynga Poker. Due to pushing out these games, the company now forecasts bookings only reaching $695 to $725 million, compared to prior guidance of $770 to $810 million. Note how Farmville 2 and Zynga Poker accounted for 32% and 24% of online game revenue showing the importance of new mobile games in the major franchises.

The real key to Zynga is the level of bookings with the below chart highlighting the recent turnaround.

(click to enlarge)

Source: Zynga Q2 Presentation

The Q3 bookings guidance of $165 to $175 million shows how the rebound in bookings will come to a sudden halt this quarter.

Strong Game Lineup

While it's never exciting to see the stock you own lower guidance even only for the short-term, the key to game developers are the lineup of games in production. In this case, Zynga provides a little give and take with the announcement of several partnerships for new games already in the works while delaying the highly touted mobile versions of existing popular franchises.

The big news was the entry into the sports gaming category where mobile spending is significantly less than on consoles. For those who don't recall, Mattrick previously worked at Electronic Arts (NASDAQ:EA) which developed a strong sports franchise on consoles. In this case, Zynga created Zynga Sports 365 and partnered with the National Football League, NFL Players Association and Tiger Woods to create new offerings for football and golf games. In addition, the company plans runner games based off Looney Tunes. Below is a quick list of the upcoming games and expected launch time:

NFL Showdown - currently live in geo-lock and certain markets.

Tiger Woods golf - global launch in 2015.

Words With Friends - delayed to later in 2014.

Zynga Poker - delayed to later in 2014.

Looney Tunes Runner - holiday season 2014.

NaturalMotion - several games delayed.

Back to the Glu Mobile example, the struggling mobile game developer went through a similar period in mid-2013 where it delayed key updates to franchise games in order to fine-tune them prior to release. At the time, the company had a major release that had mixed results leading them to modify future games to improve performance. In the same tune, Zynga likely encountered some issues with Farmville: Country Escapes that it thought worthy to modify and improve on the other games. Specifically management called out the need to tie the mobile game experience to the web game along with success seen during events. Both scenarios were likely not built into the delayed games that now need to be added.

Stock Chart

Considering the original negative reaction after hours on the reduced guidance for the rest of the year, the stock traded well only losing $0.04 the day after earnings. Based on the chart below, the trade down to $2.75 could've been the bottom:

(click to enlarge)

The Glu Mobile example is very interesting considering the similar reaction to tank toward 52-week lows. On August 6, the company lowered guidance for Q3 and the stock plunged. As the chart below highlights, the drop was the ultimate buying opportunity leading to significant gains over the next year. The company eventually rebounded due to the success of Deer Hunter 2014 and other games.

(click to enlarge)

Conclusion

With $1.15 billion in cash, a potential star CEO, and a very attractive stock valued at an enterprise value of 1x bookings, investors should load up on this stock. One can wait for more clarity on the delayed games or watch the success of the sports category, but the valuation is too attractive to wait.

Disclosure: The author is long ZNGA, GLUU. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Source: Don't Fear Zynga Due To Game Delays