Social gaming services provider Zynga Inc. (ZNGA) gained traction last year on the rise in online social games during the height of the pandemic-driven lockdown. With an $11.20 billion market capitalization, it is an established large-cap company in the video gaming space. 

However, the stock is currently trading 1.7% below its 52-week high of 12.32, which it hit on February 19.

So, here’s what we think could shape ZNGA’s performance in the near term:

Inorganic Growth

ZNGA has been expanding its operations through multiple acquisitions over the past few quarters. On May 6, the company acquired mobile programmatic advertising and monetization platform Chartboost for approximately $250 million. The acquisition is expected to be closed in the third quarter of 2021 and should allow ZNGA to leverage Chartboost’s more than 700 million monthly users and more than 90 billion monthly advertising auctions to facilitate its long-term growth. ZNGA CEO Frank Gibeau said, “By combining Zynga’s high-quality games portfolio and first-party data with Chartboost’s proven advertising and monetization platform, we will create a new level of audience scale and meaningfully enhance our competitive advantage in the mobile ecosystem.”

On March 3, ZNGA acquired cross-platform game studio Echtra Games, thereby providing access to the latter’s proprietary cross-platform development tools and technologies and human resources. This move should strengthen ZNGA’s development capabilities as well as boost its brand and iconic license growth, thereby expanding its total addressable market.

Low Profit Margins

ZNGA’s trailing-12-month revenues came in at $2.25 billion, up 54.2% year-over-year. The company’s revenues and EBITDA increased at CAGRs of 37% and 28.3%, respectively, over the past three years. However, its bottom line has remained in the red over the past year. Its trailing-12-month net loss stood at $348.50 million, translating to a $0.33 loss per share. In addition, its operating loss amounted to $4.30 million over the past year.

Furthermore,  ZNGA’s 7.79% trailing-12-month EBITDA margin  is 62.6% lower than the  20.8% industry average. In addition, its net income margin, ROE, ROA, and ROTC stood at negative 15.48%, 14.53%, 5.8%, and 0.08%, respectively, and the  company’s 0.53% CAPEX/Sales  is 86.7% lower than the 4.02% industry average.

Stretched Valuation

In terms of non-GAAP forward P/E, ZNGA is currently trading at 25.83x, which is 25.7% higher than the industry 20.56x average. In addition, the stock’s 1.94 non-GAAP forward PEG ratio is 7.7% higher than the 1.80 industry average.

Moreover, ZNGA’s forward Price/Sales and Price/Cash Flow multiples of 4.09 and 68.33, respectively, compare with 1.89 and 10.53 industry averages.

Consensus Rating and Price Target Indicate Potential Upside

All nine Wall Street analysts that rated the stock have rated it Buy. The $13.89 12-month median price target indicates a 35.5% potential upside from yesterday’s $10.25 closing price. The price targets range from a low of $13.00 to a high of $15.00.

POWR Ratings Reflect Neutral Prospects

ZNGA has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ZNGA has a C grade for Momentum and Quality. The stock is currently trading slightly below its $10.51 and $10.52 respective 50-day and 200-day moving averages, which is in sync with its Momentum grade. Furthermore, the company’s lower-than-industry EBITDA margin justifies the Quality grade.

Of the 23 stocks in the C-rated Entertainment – Toys & Video Games industry, ZNGA is ranked #17.

Beyond what we’ve stated above, we have rated ZNGA for Stability, Sentiment, Growth, and Value. Get all ZNGA Ratings here.

Click here to view the top-rated stocks in the Entertainment – Toys & Video Games industry.

Bottom Line

Despite being a major player in the video gaming industry, ZNGA’s negative profitability is concerning. While the company is poised to grow significantly based on its acquisition synergies, we believe investors should wait for the company to generate positive net income and EPS before investing in the stock.

ZNGA shares were trading at $10.22 per share on Thursday afternoon, down $0.03 (-0.29%). Year-to-date, ZNGA has gained 3.55%, versus a 18.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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