Should Investors Stay Away from Zynga?

With shares of Zynga (NASDAQ:ZNGA) trading at around $3.19, 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:

C = Catalyst for the Stock’s Movement

Zynga has been the butt of many jokes recently. Is this reputation justifiable? We’ll take a look at many different factors and then form an opinion. We’ll begin with traffic. Zynga’s traffic has declined considerably over the past year. While there might be good excuses for this decline, they’re still excuses. Over the past three months, pageviews have declined 13.37 percent. That’s not terrible, but it’s certainly not a plus. The good news is that time-on-site has increased 1 percent, and the bounce rate has declined 3 percent. In regards to current rank, Zynga ranks #893 globally and #840 in the United States.

According to HelpOwl.com, gamers have given Zynga a 2.38 of 5 rating, which is subpar. The most common complaints are poor customer service, unhappiness with changes to existing games, and game crashes.

According to Glassdoor.com, the company culture is average. Zynga has received a 3.1 of 5 rating, and 53 percent of employees would recommend the company to a friend. There are passionate reviews from both sides. Employees seem to either love or hate their job. Therefore, the company culture can’t be classified as great.

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Let’s take a quick look at some positives and negatives for Zynga.

Positives:

  • Recently beat earnings expectations
  • Real-money gaming potential
  • Filed for gambling license in Nevada
  • Strong balance sheet

Negatives:

  • Slowing revenue growth
  • Lacking profits
  • Cautious guidance
  • 30 percent decline in bookings last quarter
  • Fierce competition, including established casino brands entering arena
  • Weak margins
  • Analysts don’t favor the stock: 2 Buy, 18 Hold, 3 Sell (this is rare)

The chart below compares fundamentals for Zynga, Majesco Entertainment (NASDAQ:COOL), and Facebook (NASDAQ:FB). Zynga has a market cap of $2.40 billion, Majesco has a market cap of $23.88 million, and Facebook has a market cap of $66.15 billion.

ZNGA

COOL

FB

Trailing   P/E

N/A

N/A

1851.27

Forward   P/E

N/A

29.50

35.60

Profit   Margin

-9.80%

-5.87%

1.04%

ROE

-6.59%

-17.87%

0.64%

Operating   Cash Flow

$143.40 Million

 $5.48 Million

  $1.61   Billion

Dividend   Yield

N/A

N/A

N/A

Short   Position

N/A

1.00%

7.50%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Zynga is stronger than the industry average of 0.10.

Debt-To-Equity

Cash

Long-Term Debt

ZNGA

0.05

$1.27 Billion

$100.00 Million

COOL

0.00

$26.76 Million

$0

FB

0.20

$9.63 Billion

$2.36 Billion

 

T = Technicals Are Mixed  

Zynga has been a big loser over the past year, especially considering the strength of the market. However, the stock has performed very well year-to-date.

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1 Month

Year-To-Date

1 Year

3 Year

ZNGA

-4.46%

36.02%

-62.32%

-1.83%

COOL

9.91%

-43.49%

-75.35%

-32.69%

FB

8.68%

4.43%

N/A

N/A

 

At $3.19, Zynga is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

3.39

100-Day   SMA

2.99

200-Day   SMA

2.96

 

E = Earnings Have Been Weak              

Zynga has a difficult time delivering profits. Revenue has consistently improved on an annual basis, but the rate of growth has slowed considerably.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

N/A

121.47

597.46

1.14B

1.28B

Diluted   EPS ($)

N/A

N/A

0.11

-1.40

-0.28

 

When we look at the previous quarter on a year-over-year basis, we see a significant decline in revenue but an improvement in earnings. The same can be said on a sequential basis. Many companies have inconsistent earnings, and some have small setbacks in revenue, but this type of revenue setback is a potential red flag.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   millions

320.97

332.49

316.64

311.16

263.59

Diluted   EPS ($)

-0.12

-0.03

-0.07

-0.06

0.00

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Many states are broke. They will eventually look for any avenues possible to increase revenue streams. One of those avenues will be to legalize online gambling. This will be a plus for the industry, but it won’t necessarily be a plus for Zynga. If this environment presents itself, then there will be many big players looking to get involved, and Zynga will be nothing more than an ant attempting to survive a marching band at a parade.

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Conclusion

Zynga was given a WAIT AND SEE rating the last time it was written about in this column. However, after delving a little deeper and reading gamer reviews, that rating will have to be downgraded. As far as poker goes, the potential is good, but it’s still just potential. FullTilt had a lot more than potential and it failed miserably. Many other poker sites have also failed. Furthermore, Zynga’s revenue growth has slowed considerably, the company culture isn’t great, traffic has declined, and profits are harder to find than Waldo while reading by candlelight. Aside from real-money gaming potential (not just poker), there isn’t much to like.

Zynga might trade higher in the near future, but the long-term potential doesn’t look good at the moment. However, this story is worth revisiting in about one month or so.

For now, Zynga is a STAY AWAY.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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