Can Zynga Entertain Your Portfolio?

With shares of Zynga (NASDAQ:ZNGA) trading around $3, is ZNGA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Zynga is a provider of social game services with 240 million average monthly active users over 175 countries. The company develops, markets, and operates online social games as live services played over the Internet and on social networking sites and mobile platforms. Zynga’s games are accessible on Facebook (NASDAQ:FB), as well as other social networks and mobile platforms, to players globally — wherever and whenever they want. It operates its games as live services, and they are all free to play. However, it does generate revenue through the in-game sale of virtual goods and advertising.

Today, Zynga shares rose after the company confirmed that Microsoft (NASDAQ:MSFT) Xbox chief Don Mattrick would be replacing founder Mark Pincus as Chief Executive Officer of the gaming company. Zynga has been facing some major struggles lately, but investors hope that the person who gave Microsoft the Xbox will be able to create similarly innovative technology to save it from failure. As social gaming continues to pick up steam among consumers worldwide, a pioneer in the industry like Zynga stands to see rising profits for many years.

T = Technicals on the Stock Chart are Mixed

Zynga stock has been part of a value range for most of the last year. The stock is now near the top-end of the range so it may need time before deciding on the next move. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Zynga is trading above its rising key averages which signal neutral to bullish price action in the near-term.

ZNGA

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Zynga options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Zynga Options

72.36%

93%

90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Zynga’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Zynga look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

100.00%

94.40%

-700.00%

-400.00%

Revenue Growth (Y-O-Y)

-17.88%

-0.02%

3.20%

19.11%

Earnings Reaction

-6.56%

9.12%

12.20%

-37.40%

Zynga has seen improving earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have been on the fence about Zynga’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Zynga stock done relative to its peers, Electronic Arts (NASDAQ:EA), Activision Blizzard (NASDAQ:ATVI), Facebook (NASDAQ:FB), and sector?

Zynga

Electronic Arts

Activision Blizzard

Facebook

Sector

Year-to-Date Return

42.16%

60.88%

34.84%

-7.40%

27.31%

Zynga has been a relative performance leader, year-to-date.

Conclusion

Zynga provides a social game experience to consumers all around the world. The company has recently announced that the man who brought the Xbox to life, Don Mattrick, will be their CEO with hopes of moving the company forward. The stock has struggled over the last year and is now near the top of a range so it may need time before deciding on the direction of a future trend. Over the last four quarters, investors in the company have been on the fence as earnings have only improved slightly while revenue figures have been mixed. Relative to its peers and sector, Zynga has been a year-to-date performance leader. WAIT AND SEE what the new CEO brings to the table.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.