Is Zynga Poised to Trade At Yearly Highs After Earnings?

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.

The biggest mover in the after hours period was Zynga, which saw a jump of nearly 15 percent in its share price after earnings showed that the company had managed to trim losses in the third quarter to just under $70,000, significantly beating most expectations. The company also announced that Clive Downie would become its new COO. Shares have since tempered off and now stand to have posted gains before the opening bell of just over 10 percent.

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 trading near the top-end of its range so it may need to spend some time here. 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

61.19%

13%

11%

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

Put IV Skew

Call IV Skew

November Options

Flat

Average

December 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 small 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

7.78%*

-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 had conflicting feelings about Zynga’s recent earnings announcements.

* As of this writing

P = Average 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

65.25%

72.52%

64.97%

97.60%

76.08%

Zynga has been an average relative performer, year-to-date.

Conclusion

Zynga provides a social game experience to consumers all around the world. A recent earnings release has investors really excited about the company. The stock has remained in a range for most of the last couple of years but is now trading near the top-end of this range. Over the last four quarters, earnings have been increasing while revenues have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Zynga has been an average year-to-date performer. Look for Zynga to OUTPERFORM.

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