Zynga: Riding NaturalMotion Higher

| About: Zynga (ZNGA)
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The purchase of the NaturalMotion studio might finally pay off nearly three years later.

Zynga managed a solid shift to mobile without any new games from this big studio purchase at the start of 2014.

The mobile game developer was already on the verge of growth without this potential big catalyst.

One of the big moves to be made at Zynga (NASDAQ:ZNGA) by previous CEO Don Mattrick was the large purchase of NaturalMotion. The game studio had several successful mobile games including the racing game CSR Racing and more importantly impressive graphics.

The stock traded at $3.56 on the day of the announcement and hasn't seen a lot of progress in that time that has included two more CEOs. Now the question is whether the NaturalMotion purchase is finally going to pay off big time over the holidays, providing a catalyst for the stock to finally breakout.

Back along with the Q4 2013 earnings report on January 30, 2014, Zynga announced the purchase of privately-held NaturalMotion for $527 million. The deal involved $391 million in cash and 39.8 million shares for a company expected to generated 2014 bookings of up to $80 million.

The deal brought cutting edge technology, yet until recently, Zynga went well over two years before releasing a meaningful game from the purchase. Until the holiday release of Dawn of Titans, NaturalMotion will have only delivered the follow-up game to the hit CSR Racing that was already released prior to the acquisition.

In essence, the deal has been a total failure in the goal of accelerating mobile growth, though signs are starting to show that NaturalMotion could finally pay off in a big way. The release of CSR Racing 2 in July was an initial hit, but until the last week the game appeared doomed for ultimate failure. The game now ranks close to a Top 10 grossing on the crucial iPhone generating over $115K per day in the U.S. alone.

Source: AppAnnie

Possibly even more important is finally the release of DoT. The action strategy game has seen high monetization in soft launch and has the cutting-edge technology experience for a mobile game that could become the first mobile mega hit for Zynga. According to ThinkGaming, the top iPhone games produce over 10x the revenue of CSR2.

What's for sure is that the combination of these games along with the release of FarmVille: Tropic Escape will finally usher Zynga into a dominant mobile game position. My last research article focused on this subtle shift and how the stock would trade better if the market only viewed the mobile bookings without taking into account the sliding web bookings.

As a reminder, Q3 mobile bookings were up 34% YoY to $162 million. Mobile accounted for 83% of bookings and these three potential hit games will help accelerate the shift with Zynga finally having a slate of games released from NaturalMotion.

The key investor takeaway is that tepid guidance from the mobile game developer provided on November 2 will probably lead to a $200 million bookings quarter and produce another record quarter for mobile. Total bookings last Q4 were only $182 million and didn't top that level until the recent $196 million for Q3.

Most importantly, the release of DoT at the end of Q4 could set up 2017 for a phenomenal start as the size and scope of mobile bookings will finally push the whole company back into growth mode next year. For this reason, Zynga might finally head back above $3 for good.

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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