What Do These Factors Say About Zynga?

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 in more than 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) and other 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.

Recently, Zynga reported earnings that did not meet investor expectations, but Zynga shares rose after the company confirmed that Microsoft (NASDAQ:MSFT) Xbox chief Don Mattrick would be replacing founder Mark Pincus as CEO of the gaming company. 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 trading sideways in recent months. The stock is trading lower Wednesday as it continues to suffer from a weak earnings release. 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 slightly below its key averages, which signals neutral to bearish price action in the near term.

ZNGA

Source: Thinkorswim

Taking a look at the implied volatility 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

54.38%

20%

18%

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

Put IV Skew

Call IV Skew

September Options

Steep

Average

October Options

Steep

Average

As of Wednesday, there is 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 minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

33.33%

100.00%

94.40%

-700.00%

Revenue Growth (Y-O-Y)

-30.60%

-17.88%

-0.02%

3.20%

Earnings Reaction

-14.00%

-6.56%

9.12%

12.20%

Zynga has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have expected more from Zynga’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

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

Zynga

Electronic Arts

Activision Blizzard

Facebook

Sector

Year-to-Date Return

25.42%

83.20%

63.28%

40.20%

42.84%

Zynga has been a poor relative performer, year-to-date.

Conclusion

Zynga provides a social game experience to consumers all around the world. The company recently announced that Microsoft Xbox chief Don Mattrick will be joining the company; however, it also reported earnings that disappointed investors. The stock has been trading sideways this year and seems likely to continue this path. Over the last four quarters, earnings have been increasing while revenues have been decreasing, which has investors expecting more from the company. Relative to its peers and sector, Zynga has been a weak year-to-date performer. WAIT AND SEE what Zynga does this coming quarter.

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