A day after Zynga (ZNGA +7.2%) largely moved sideways in spite of a huge equity selloff and a downgrade to Underperform from BofA/Merrill, shares are shooting higher in response to an upgrade to Buy from UBS' Eric J. Sheridan.
Following the company's Q4 numbers, Sheridan has "increased confidence" Zynga's core operations are stabilizing under new CEO Don Mattrick, and thinks its latest job cuts will lead EBITDA margins to bottom. 20%+ EBITDA margins are considered possible by 2015.
He also thinks the NaturalMotion acquisition "will result in a greater level of scale and innovation to the broader Zynga mobile game pipeline." Many tech writers have made similar arguments. Whereas Zynga is known for a data-driven approach to game development that focuses on rapid monetization, NaturalMotion CEO Torsten Reil brings a very different mindset to the table.
Reil: "We don’t want to design [a title] to be a hard-core monetizing game. It has to be a delightful, wholesome experience."
Sheridan thinks Zynga's Q1/2014 guidance will prove conservative, and sees room for NaturalMotion to grow by launching new titles, bringing existing ones to Android, and licensing its Euphoria animation engine.