As predicted prior to the Q4 earnings release Wednesday night, Zynga (NASDAQ:ZNGA) would report generally mixed results. The prediction was that the stock had limited downside from the $2 level at the time of publishing the article.
Clearly, ZNGA continues struggling with declining web games and users while growing mobile. Most market participants want to tell investors to continue shorting the stock and that it has no future. Several reasons exist that make the stock a value at this level with solid catalysts for higher prices in the future.
The lunacy in the market surrounding Zynga's shares is best highlighted by this Fox Business News video titled "Zynga shares on death watch?". The stock was placed on death watch by the correspondents, but they only mentioned the active user base that doesn't reflect the shifting fundamentals of users.
The real story in buying Zynga at around $1.85 is that the company has plenty of assets to cushion investors on the downside. At the same time, it is growing bookings in the mobile-game market that App Annie forecasts to double by 2020 to nearly $75 billion.
Zynga did mess up on the stock buyback by utilizing the full $200 million approved prior to the earnings release at an average price of $2.50 per share. The company bought 80 million shares and could easily buy another 20 million shares if it had waited until now. Of course, nobody knew the market weakness would linger.
The move leaves Zynga with about $900 million in cash and some $500 million in real estate from the corporate headquarters. With about 850 million shares outstanding now, the stock has a valuation of only $1.57 billion. With solid assets of $1.4 billion, the stock trades for a minimal enterprise value though Zynga has a mobile-gaming business with $700 million in annual bookings and several key franchise games that should actually grow revenues in 2016.
The combination of a strong end market and solid assets doesn't suggest such a dire situation portrayed by the market. The stock is being sold at $1.85 due to a vast misunderstanding of the prospects of Zynga.
So, while a death watch on the stock is horribly misplaced reporting, the key to higher stock prices are hit games. The market is obsessed with user growth though that number is highly impacted by a reduction in the web users that had limited monetization in the first place.
Only looking at users is what makes the death watch mindset misplaced. One would think that stable bookings might provide a clue that Zynga is far from a horrible position. Sure, the monthly unique users declined to 48 million in Q4, the data needs to be offset with the growth in daily bookings per user.
Source: Zynga Q4'15 earnings presentation
The part of the story that I've been telling for a while and mostly ignored by the market is that the company continues growing the casino games and growing bookings on mobile at a solid clip. The negative remains the release slippage of the attention-grabbing action strategy games, Dawn of Titans and CSR2.
For those paying attention, Zynga is no longer reliant on the Farmville franchise as slots have taken over as the bigger driver of bookings. For Q4, the company obtained 53% of revenues from the casino sector led by the slots category.
Source: Zynga Q4'15 earnings presentation
The bear case is that Zynga is a dying company. The reality is that the mobile-game developer is slowly turning around the business. At the current stock price, the company trades at nearly the cash balance and real estate. Using a meager multiple of 2x revenues plus the $1.4 billion in cash/real estate, the stock has a base value of roughly $3.30. Any big hits such as Dawn of Titans and the multiple expands, providing a catalyst for a much higher price. The current price though has no justification for the actual business prospects of Zynga.
Disclosure: I am/we are long ZNGA.
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.
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