Seeking Alpha
Long/short equity, deep value, value
Profile| Send Message|
( followers)  

While many questions remain about the recent flurry of Internet related IPO’s the name Zynga (ZYNG) sticks out. Why? Now its not because the firm is hemorrhaging money like there’s no tomorrow but actually for the opposite reason. Instead, the firm has been able to illustrate a sustainable business model and even reached profitability according to the S-1 statement it filed with the SEC. While it may sound like a myth when compared to other Internet companies such as Pandora (NYSE:P), Zynga does actually have the secret formula for profitability.

People will likely keep debating the topic of whether this is the next tech bubble until they’re blue in the face but regardless, a profit is a profit when it comes to Zynga. You can’t really argue with countless hundred-dollar bills going into a bank account. Once Zynga gets closer to its IPO date, we think this is a name to keep an eye on and probably a BUY (unless catastrophic news about it is released). Further, the reason for our position doesn’t deal solely because of its current profitability (it helps some) but because it’s breaking the mold when it comes to the gaming industry in a few different ways.

The Platform Mercenary

While anyone familiar with Zynga probably first heard about it somehow in relation to Facebook, the reality is this company is a platform mercenary. What does that mean you ask? It means that they aren’t loyal to one platform. The firm may be heavily dependent upon Facebook today for distributing its games and generating revenue but that’s unlikely to be the case in the future.

The firm’s bold move in some ways is earth shattering relative to big gaming firms such as Electronic Arts (ERTS), Activision Blizzard (NASDAQ:ATVI), and Take-Two Interactive Software Inc (NASDAQ:TTWO). Why? Historically these big names have remained dependent and focused on just a few distribution points (gaming consoles/computers). These distribution points have both pros and cons but given the potential for online gaming through social media platforms the idea of keeping rank and file in a time like this seems foolish.

Zynga as firm understands the flaws and limitations of being dependent upon third parties. This is why they refuse to be a slave to the machine as it moves forward. In other words, this firm bows to no one, will always look out for number one first, and is likely to even surprise industry veterans in our view.

Talk Is Cheap, Kid

If you ever hear someone talk a big game but rarely follow through for the weakest reason, then you know what we’re talking about. Fortunately, with Zynga this isn’t the case. Most recently, the firm has made good on its promise to become a platform mercenary by acquiring Five Mobile Inc, a Canadian company that develops mobile applications for large companies.

While any acquisition for a company that just recently became profitable may seem far-fetched, that isn’t the case with Zynga, since this is the 15th acquisition in the last 13 months. To say the least, the firm definitely puts its money where its mouth is by laying down the foundation without missing a beat. Does it have a much bigger picture in the works? We think so and have little doubt that whatever they’re building in the background will likely impress given it’s current success already on multiple fronts.

Conclusion

Unfortunately, we’ll have to wait a bit till Zynga hit’s the stock market but regardless we think it will be well worth the wait. Normally we aren’t huge gaming fans given that it’s really a hit or miss business model in some ways but given Zynga’s willingness to execute out of the box thinking from day one has caught our interest. In the meantime we’ll take a PASS on every other gaming name ranging from Electronic Arts to Activision Blizzard while we wait for Zynga. We see no significant reason to make a hasty decision or take action before all the cards are on the table.

Source: Waiting for the Platform Mercenary Zynga and Its Allegiance to No One