After a big rally off the February lows, Zynga (NASDAQ:ZNGA) sold off nearly 7% following the Q2 results. The numbers were generally solid and portrayed the game developer as heading in the right direction.
A lot of confusion typically surrounds guidance versus bookings, causing investors to miss the big improvement in the key trend. With an enterprise value (not counting real estate) of $1.55 billion, is Zynga still a buy?
With the big hit CSR2, investors were expecting big revenue numbers in the Q3 guidance. Zynga generated $182 million in Q2 revenues with Q3 guidance for revenues of $170 million to $180 million.
Naturally, that revenue number isn't very appealing, but the key number for a mobile-game developer offering in-app purchases is bookings. This number shows a remarkably different view of the business.
As highlighted on a constant basis in past research, Zynga was constantly fighting the shift from Facebook (NASDAQ:FB) platform revenues to mobile. A lot of the mobile gains in the last year were only offsetting the declines from desktop. The key is that the company is finally to where mobile revenues are at 80% of total revenues.
Source: Zynga Q216 presentation
The company guided to Q3 bookings of $180 million to $190 million. The big guidance was seemingly unnoticed with the focus on the GAAP revenue number. The big point being that the bookings guidance was above any projections over the prior year. Not to mention, Zynga has a history of beating the top-end guidance placing a Q3 bookings total of $200 million in play.
Viewed in the above light, management is forecasting bookings growth over last year. In addition, the number is set to break above the recent range of $175 million on the lowside to $182 million on the upside.
The Q4 guidance should improve on this trend with a new game in the Farmville franchise and finally the release of Dawn of Titans. The success of the delayed CSR2 game should provide more confidence that NaturalMotion would deliver another hit despite the lengthy delays.
As Zynga returns to growth and gets operating expenses normalized with revenues, the stock clearly has the ability for multiple expansion. Compared to industry leaders Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI), Zynga trades at half the EV to revenues multiple.
Obtaining such a EV to revenue multiple jives with the $5 price target that Jefferies places on the stock. Based on the $2.77 close last week, the analyst sees 80% upside on Zynga.
The key investor takeaway is that Zynga is no longer the death watch value when the stock dipped below $2 earlier this year, but the stock could still have a ton of upside. Based on the bookings trend not caught by the market, the company is set to break out of the range of the last year bringing more investors into the stock and increasing the valuation multiple more in line with sector peers.
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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