The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Tuesday, Zynga (NASDAQ:ZNGA) announced the launch of its network, Zynga With Friends, as well as new partner programs. On Tuesday, Zynga introduced theZynga API, a new layer of infrastructure allowing third-party development on its platform, as well as its Zynga with Friends network, allowing users to connect to a single network using Facebook,, and iOS or Android smartphones. Zynga announced new developer partners, including Majesco, and announced that its first third-party game, Rubber Tacos, will soon become available on Zynga also announced a dedicated partner program for its mobile platform, which provides full network distribution to mobile game developers.

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Zynga also announced several new games.  On Tuesday, Zynga launched its latest mobile-based With Friends title, Matching with Friends, on iOS. Zynga also announced two new titles in its Ville genre. Web-based The Ville, a “house and people” game similar to The Sims Social, launches today. ChefVille is a cooking game that engages players’ “real life” by emailing recipes mastered in-game to be prepared at home. It will be released soon on Facebook and Zynga also announced a new casino game,  Zynga Elite Slots, and showcased its new arcade game, Ruby Blast, launched last week.

Misperception that monthly active user (MAU) growth and revenue growth are immediately correlated.  We believe Zynga shares have been negatively impacted by MAU declines as investors became concerned that fewer users result in lower total revenue. We disagree, and believe that the majority of gamers who discontinue playing Zynga titles are likely to be non-payers, with payers spending more as they make a greater investment of time in each game.

As Zynga expands its reach, increases engagement and broadens the appeal of its games, we expect the company to continue its dominance of the social games market. Zynga still has the largest player audience on Facebook, with roughly five times as many MAUs (≈ 255 million as of June 27, according to AppData) as its next closest competitor.

Maintaining our OUTPERFORM rating and our 12-month price target of $17. Our price target reflects an EV/EBITDA multiple of ≈ 19x our estimate for 2013 adjusted EBITDA, or an EV/EPS multiple of ≈ 33x our 2013 EPS estimate. We think that the company’s market dominance and rapid recent user growth will allow it to continue robust growth for the foreseeable future.

Michael Pachter is an analyst at Wedbush Securities.

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