Zynga: Finally A Mobile Winner

| About: Zynga (ZNGA)

Summary

The recent success of a mobile game ushers in a new era for Zynga.

A big mobile hit will change the market perception of the game developer.

The stock still offers a very compelling valuation despite trading at the 52-week high.

The biggest rap of Zynga (NASDAQ:ZNGA) since the peak of the Facebook (NASDAQ:FB) gaming platform was the lack of a solid mobile lineup. The game developer hired Don Mattrick to usher in the shift to mobile, but the company struggled to make the shift fast enough.

Now Zynga has a top 10 mobile game that ironically comes from a purchase made by Mattrick over 2 years ago. The question now is whether the company has finally figured out the mobile world to finally reward shareholders.

Shift To Mobile

The biggest issue with Zynga is that if investors viewed the company based on the growth in mobile revenues, the stock would be higher. The company produced $139 million in mobile bookings during Q1 for a 31% growth rate.

The company made progress in moving Facebook platform games like the Farmville and Zynga Poker franchises to mobile, but the games struggled to offset the losses from the online platforms. The gains actually came from the Casino category. The category though lacked any big winners.

Now the irony is that the big $527 million purchase by Mattrick to grab the animation talent of NaturalMotion might turn out as a brilliant move. The company had released the very successful CSR Racing and other top games like Clumsy Ninja. Unfortunately though, NaturalMotion has struggled to release a couple of highly anticipated games.

Source: Zynga

On June 30, the company finally released CSR Racing 2 to huge success. According to App Annie, the game hit the top download spot for games on the iPhone in nearly 100 international locations.

Click to enlarge

Source: App Annie

The original CSR Racing had similar numbers back in 2012 during a less competitive mobile-game market. Of course, Zynga didn't own the game at that time.

Now investors can start looking forward to the release of the highly anticipated Dawn of Titans. The massive PvP game has the potential to rival the action games that now top the mobile gaming grossing charts with animation features that could wow the market.

Mobile Opportunity

The biggest deal is that Zynga has a massive opportunity to grow their share of the mobile pie. The revenue totals for top 10 games are enormous, but the discrepancy between the 10th position and the top game is incredibly large.

According to ThinkGaming, Pokemon GO generates $1.6 million in daily revenues in the U.S. from the iPhone alone. Even number 6 Candy Crush Saga produces nearly $300,000 in daily iPhone revenues in the U.S. In comparison, CSR Racing 2 is already highly successful with daily revenues of $116,000.

Click to enlarge

Source: ThinkGaming

Zynga has the ability to double and triple those revenue totals. One needs to consider that Zynga only generates slightly over $230,000 in comparable revenues with a current game lineup of over 10 games in the top 200 grossing ranks. The problem is that games like FarmVille 2: Country Escape only produces around $20,000 a day.

These games are solid generators, but the company has needed a big hit to drive the stock higher. These comparisons of course don't even include the iPad or Google Play revenues in the U.S, not to mention international revenues.

Takeaway

Despite hitting 52-week highs, Zynga still offers a compelling value with the potential of the NaturalMotion games to build on the existing game franchises. With roughly $850 million in cash, the stock trades with an enterprise value of $1.6 billion, or roughly 2x the expected revenue levels. This valuation doesn't even include vaulable San Francisco real estate worth north of $500 million.

Any hit mobile game that changes the narrative on Zynga will not only increase the revenue totals, but as well raise the valuation multiple that investors are willing to pay for a company returning to growth mode.

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.

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.