Can Zynga Break Higher?

With shares of Zynga (NASDAQ:ZNGA) trading around $4, 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.

The price of Bitcoin shot up past $1,000 Monday after Zynga, the San Francisco-based online gaming company, announced it would test using the digital currency as payment. Bitcoin, the volatile unregulated currency, has hit highs and lows in recent weeks and has gained more widespread use. The currency recently plummeted in value after China took actions to limit its use in the country. It hit a high of $1,093 on the Mt. Gox online exchange, a major Bitcoin trading exchange, before retreating to around $1,040 Monday afternoon. In an announcement posted to the website Reddit over the weekend, Zynga said it would accept Bitcoin as payment for games such as “FarmVille 2,” “Castleville” and five other games. ”In response to Bitcoin’s rise in popularity around the world, Zynga, with help from BitPay, is testing expanded payment options for players to make in-game purchases using Bitcoin,” the company said.

T = Technicals on the Stock Chart Are Strong

Zynga stock has remained in a trading rang for most of the last couple of years. The stock is currently surging higher and looks poised to continue. 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

55.91%

83%

80%

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

February Options

Flat

Average

March 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

N/A

33.33%

100.00%

94.40%

Revenue Growth (Y-O-Y)

-36.02%

-30.60%

-17.88%

-0.02%

Earnings Reaction

5.36%

-14.00%

-6.56%

9.12%

Zynga has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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

6.19%

1.79%

3.09%

7.89%

5.74%

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

Conclusion

Zynga provides a social game experience to consumers all around the world. The price of Bitcoin shot up past $1,000 Monday after the company announced it would test using the digital currency as payment. The stock has remained in a range for most of the last couple of years, but is now surging higher. Over the last four quarters, earnings have been increasing while revenues have been decreasing, which has pleased investors. Relative to its peers and sector, Zynga has been a relative year-to-date performance leader. Look for Zynga to OUTPERFORM.

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.

More From Wall St. Cheat Sheet: