Zynga Inc (NASDAQ:ZNGA) is a social game developer that was one of the best-performing video game stocks last year. But the momentum shifted in 2021 to the downside, so is Zynga stock a buy on the dip?
The company more than tripled in value since CEO Gibeau started his tenure. It does business in over 175 countries and is expected to generate $2.8 billion in revenue this year. That makes it a relatively small company with plenty of growth potential.
However, ZNGA share price is down about 33% since its all-time high in mid-February. Like other video game companies, Zynga could suffer further when employment rises, but until then, gamers are looking for entertainment and distractions.
Zynga is one of the leading providers in social gaming. It first gained notoriety as a partner of Facebook, but these days standalone mobile versions are available for popular titles.
The company was founded in 2007 in San Francisco, California and produces popular titles like Farmville, Zynga Poker and Mafia Wars.
It monetizes these games through in-game purchases and ads, which some lament can get spammy. Still, it’s a successful revenue stream that has catapulted the firm to become a global brand.
ZNGA continued to grow through a series of brand partnerships, mergers, and acquisitions. Its Zynga Platform provides game developers with the Zynga API, which Zynga used to publish games like The Ville and Bingo Blitz.
The game developer has more than 30 million daily active users on Facebook alone, which means it has a broad audience. It also reaches a lot of people through Zynga.com and other social media platforms, where users play games for free or can choose to purchase in-game items.
Why Did Zynga Stock Drop?
Although a popular gaming platform, Zynga saw user numbers drop over the summer. This is despite reporting second-quarter bookings of $712 million, a 37 percent year-over-year increase. That’s because Apple’s privacy changes made it harder to grow its approximately 205 million monthly active users on iOS games.
Bearish investors are worried that the company won’t be able to continue its current growth trajectory. It nearly tripled its user base over the past year, but it still has plenty of room to go in the larger video game industry.
Arguably, the recent ruling in the Epic Games v Apple lawsuit could give the company another tailwind. The ruling specifically focuses on in-app payments for video games, and Zynga stands to save a lot of cash if it can convince its large user base to bypass Apple’s payment system for its own.
Is Zynga Stock A Sell?
If you already lost money investing in Zynga at the peak, you should hold until you break even. Buying the dip is a great play for value investors who believe the company will recover. It took a 10 percent drop after earnings, which scared away some investors, but those with diamond hands could prevail by year end.
Zynga should have no issues holding a $10 billion valuation, based on its strong earnings reports over the past 12 months and relatively low valuation. This is a bad time to sell if you’re experiencing losses, because the outlook is rosy ahead.
Zynga Financial Outlook
Analysts generally believe Zynga is underweight and its stock price target is estimated at a $12.00 value. Its price-to-sales ratio is over 33% lower than it was a year ago, but it’s operating cash flow of $161 million last quarter is an 11 percent year-over-year increase.
Zynga did get a temporary boost from the news of the judgement against Apple’s in-game payment tax. That’s just one sign of good things to come.
Management spent heavily buying companies like Rollic (which has over 1 billion worldwide downloads) and Chartboost. This advertising and monetization platform has a global audience of over 700 million monthly users.
It also spent $525 million to buy Starlark, a mobile game developer that will extend its Chinese market exposure.
These temporary expenses should bring long-term profits, as they play into the company’s key revenue streams.
Headwinds Facing Zynga
Zynga may have some tailwinds, but it faces several obstacles moving forward. Gamers are a fickle crowd, and what’s popular today may not be tomorrow. The company will have to continue spending heavily to keep its business running at levels investors
It could be a while before investors see returns. And while people are going back inside for entertainment in the winter, a temporary spike in demand won’t satisfy long-term investors.
The pandemic dragged on longer than anyone expected, and people are getting tired of being cooped up. As more people go outside for real-world connections, disconnecting from digital distractions poses a threat to ZNGA.
Is Zynga Stock A Buy: The Bottom Line
Zynga was one of the highest-performing video game companies for the past five years, but it fell off two cliffs this year. That has investors shaken up, although it could mean a discounted opportunity for those seeking to buy the dip.
The company’s stock was relatively unscathed by the coronavirus crash that took down the rest of the market. Its luck didn’t hold out though, and it’s been a volatile investment ever since. Nevertheless, it provides a value opportunity for investors with an appetite for risk.
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