Is Zynga Ready to Explode?

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 develops, markets, and operates online social games as live services on the internet, social networking sites, and mobile platforms in the United States and internationally. The company provides its online social games on Facebook and other social networks, and mobile platforms, as well as through Zynga.com. Social gaming is a relatively new field that is picking up steam. As an increasing number of people engage through these platforms, look for Zynga to remain a leader in the industry.

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Head on over to the next page to explore the technical landscape of Zynga’s stock…

T = Technicals on the Stock Chart are Mixed

Since its initial public offering last year, Zynga stock been in a decline. The stock is currently seeing a trend of higher highs and higher which may be positive signs. 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 holding up near a couple of key averages which may 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

78.63%

53%

56%

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

Put IV Skew

Call IV Skew

April Options

Steep

Average

May Options

Steep

Average

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

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

95.74%

-700%

-383.02%

-1200%

Revenue Growth (Y-O-Y)

-0.03%

3.2%

19.11%

32.15%

Earnings Reaction

9.12%

12.2%

-37.4%

-9.55%

Zynga has seen increasing revenue growth but is still working on its earnings growth. From these figures, the markets have been very emotional about Zynga’s last four earnings announcements. However, the last two earnings announcements seem to have excited investors.

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P = Excellent Relative Performance Versus Peers and Sector

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

Zynga

Electronic Arts

Glu Mobile

Activision Blizzard

Sector

Year-to-Date Return

30.96%

22.77%

15.32%

34.9%

9.5%

Zynga has dominated the competition in year-to-date performance.

Conclusion

Zynga participates in a new industry that has potential to see explosive gains. The earnings and revenue picture is still vague but the markets have really liked the last two earnings announcements. In fact, these last two announcements have generated a significant bid in the stock that has caused it lead its peers and sector in relative performance. Look for Zynga to continue to OUTPERFORM.

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