The market is spooked by some of the large selloffs after stocks report weak Q4 numbers or provide tepid forward guidance. The key though is to understand where the stock comes from heading into the earnings release.
In the case of Zynga (NASDAQ:ZNGA), investors apparently fear a LinkedIn (LNKD)-type moment when the more logical outcome is something similar to fellow mobile game developer Glu Mobile (NASDAQ:GLUU). One prime reason exists for a positive outcome regardless of the results when Zynga releases earnings after the close on Wednesday.
Not Much Going On
The biggest problem with Zynga is that the company isn't making much progress in producing hit mobile games. The company has had some success with slots games, but nothing real high profile for a long time.
Based on iPhone numbers in the U.S., the top grossing games are both slots games with the top three in the casino category.
Maybe even worse, most of these games are starting to age. The hope is that delayed games, Dawn of Titans and CSR2, turn into big hits in early 2016. Both games were getting solid ratings and strong monetization in early testing, but the recent inability of new games to crack the top lists and the lack of success by Zynga doesn't portend a lot of hope for these games. Otherwise, the stock wouldn't have dipped to new lows prior to earnings.
Cash Is King
The prime reason that the dip below $2 on Monday provides a buying opportunity is the cash levels. Not including the San Francisco headquarters asset valued at $500 million, Zynga is close to trading at an enterprise value of 1x forward revenue forecasts.
Factoring in the real estate and the $1.1 billion in cash, Zynga trades near the levels where Glu Mobile recently soared 50% despite lackluster Q1 guidance.
In addition, Zynga approved a $200 million stock buyback that will help boost the stock. At the closing price of $2, the company could quickly eliminate 100 million shares without denting the cash on the balance sheet.
Zynga will likely hit the Q4 targets of break-even and $179 million in revenue and provide similar guidance for Q1. At $2, the quarterly numbers won't matter. The stock trades at levels that remarkably mirror those of Glu Mobile prior to its recent big rally.
The recommendation is for investors to position for a rally after earnings with the stock pricing in the expectation of horrible news.
Disclosure: I am/we are long ZNGA, GLUU.
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.