First of all, I must say I'm aware of all the troubles Zynga (NASDAQ:ZNGA) has been going through, including the seemingly ill-advised, perhaps euphoric, acquisition of "Draw Something". The troubles also include deep slashes to yearly revenue estimates, and obviously the company is producing losses (except on a pro-forma basis).
But here's the thesis why I bought Zynga:
- Zynga is cash flow positive (although all of it comes from paying employees with shares);
- Zynga paid and recognized paying to employees using ZSUs (Zynga Stock Units) vested at an average of $11.67. That would have been the same as paying employees with stock sold at $11.67, so for anyone buying today Zynga really was cash flow positive in spite of paying employees with shares (the P&L overstated the value of the vested shares);
- Zynga has a lot of cash on its balance sheet. People sometimes quote $1.1 -1.2 billion, but in truth it's more like $1.53 billion (excluding $100 million in debt), because the $426 million in long-term marketable securities can also be considered cash. So at $2.84, 74% of the market capitalization is cash. The entire gaming business is thus worth just $531 million. That doesn't seem much for a >$1 billion/year social gaming business with potentially high margins if well managed.
In short, right now there's a potentially large and profitable social gaming business available for just 0.5 times sales. This should be very attractive to other players in the space, such as Electronic Arts (NASDAQ:EA) or even Facebook (NASDAQ:FB) itself. These could certainly make a move for Zynga if they recognize all that cash on the balance sheet makes the acquisition of the whole company very, very cheap.
- Zynga can continue to underdeliver and eventually destroy the franchise.
- Facebook can continue plunging and pull Zynga shares with it.
Pondering my long thesis and the risks involved, I decided to pull the trigger and buy at $2.84. I bought a small position because I don't like buying against the trends in place, and those surely are negative at this point.
Disclosure: I am long ZNGA.