Zynga Inc. (ZNGA - Get Rating), a global leader in interactive entertainment, develops, markets, and operates online social games as live services played on the Internet, social networking sites, and mobile platforms. ZNGA connects the world through its games available in over 150 countries, and to date, more than one billion people have played ZNGA’s franchises. The company primarily generates revenue from two segments – Online Games and Advertising.

ZNGA is one of the best user engaging gaming stocks with record revenue growth. In the third quarter that ended September 2020, the company witnessed the highest revenue and bookings in its history with revenue of $503 million, growing 46% year-over-year. Despite having a highly diversified live services portfolio, the company is still unprofitable. ZNGA reported a loss of $0.11 per share compared to the quarter-ago loss of $0.16 per share.

With robust growth in its global business model, the stock gained 61.3% year-to-date. However, because of the financial losses and a number of other factors, ZNGA has a “Neutral” rating in our proprietary ratings system.

Here is how our proprietary POWR Ratings system evaluates ZNGA:

Trade Grade: B

ZNGA is currently trading higher than its 50-day and 200-day moving averages of $9.06 and $8.31, respectively, indicating that the stock is in an uptrend. However, the stock’s 1.4% return over the past three months reflects a meager short-term bullishness.

During the last reported quarter, ZNGA recorded mobile daily-active users of 31 million, up 53% year-over-year, and monthly-active users of 83 million, rising 23% year-over-year, its best average in six years. Moreover, the company generated operating cash flow of $113 million, growing 65% year-over-year.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, ZNGA is fairly positioned. The stock is currently trading 7.7% below its 52-week high of $10.69.

Looking at the past three years, the stock has grown more than 155.7%, despite the industry being viciously competitive. ZNGA’s top-line has grown at a CAGR of 27.4% during the same period. However, the advertising segment’s contribution to total revenue has been consistently declining quarter-over-quarter, as a result of advertisers slashing their budgets. Moreover, Apple (AAPL) implemented its new policy curbing marketers’ access to users’ unique Identifier for Advertisers (IDFA) in June. This could have a long-term impact in terms of the company’s revenues.

ZNGA has made a series of acquisitions over the past few years, expanding both its player base and international reach. The company has recently completed the purchase of an 80% stake in Istanbul-based mobile games developer, Rollic for $180 million, allowing the company to enter the hyper-casual game segment. However, the company is relying on inorganic, pertinent strategic acquisitions as a part of its growth strategy and management believes that the company is “well-positioned for further M&A.”

Peer Grade: C

ZNGA is currently rated #7 out of 15 stocks in the Entertainment – Toys & Video Games industry. Other popular stocks in the group are Electronic Arts (EA - Get Rating), Activision Blizzard, Inc (ATVI - Get Rating), and Nintendo Co. Ltd. (NTDOY - Get Rating). ZNGA has comfortably beaten the year-to-date performance of all these industry participants. EA, ATVI, and NTDOY gained 16.6%, 34.5% and 37.2%, respectively, over this period.

Industry Rank: B

ZNGA is part of the StockNews.com Entertainment – Toys & Video Games industry which is ranked #35 out of the 123 industries. The companies in this industry distribute game software content and online services primarily for video game consoles, PCs and mobile phones worldwide. Demand is driven primarily by gamer demographics, and the industry saw a dramatic increase in global purchases and overall engagement amid the pandemic with people spending more time on online entertainment.

Overall POWR Rating: C (Neutral)

Despite the growing top-line and user engagements, ZNGA is rated “Neutral” due to strong competition posed by traditional consoles, declining ad revenues, and consistent financial losses, as determined by the four components of our overall POWR Ratings.

Bottom Line

Underscoring ZNGA’s popularity, the company is delivering solid operating results, and that’s reflected in its stock performance. Acquisitions, internally developed titles, and improved monetization spurred by live events is driving rapid expansion of the company’s business. However, the company is still far from profitability.

Smartphone and PC gaming are not able to completely replace traditional console gaming. Sony’s (SNE) most recent console PS5 is completely sold out in Japan, even before the official launch. Hence, ZNGA must further expand its capabilities and divert more resources towards generating more organic profits.

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ZNGA shares were trading at $9.20 per share on Thursday afternoon, down $0.67 (-6.79%). Year-to-date, ZNGA has gained 50.33%, versus a 10.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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