Will Zynga Claw Its Way Back?

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.

Zynga CEO Don Mattrick said that the mobile video game company is about halfway through his turnaround efforts at a Game Developers Conference party hosted by Covert & Co. According to a report from Re/code, this was Mattrick’s first public appearance since he left his executive position at Microsoft (NASDAQ:MSFT) to join Zynga last summer, at which point he undertook a massive turnaround effort for the struggling mobile game maker. Though he was tight-lipped on the details — we’ll find out more when Zynga reports its earnings for the first quarter of 2014 next month — Mattrick did say he’s optimistic about the the company’s progress and compared it to his early years at developer Electronic Arts (NASDAQ:EA). “To me, it feels like 1991 when EA was going public,” he said, per Re/code. “We grew from 1 to 25 percent market share [by] making purposeful bets.”

T = Technicals on the Stock Chart Are Mixed

Zynga stock has been trending higher over the last couple of quarters. However, the stock is currently pulling back and may need time to consolidate. 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

59.15%

66%

63%

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

Flat

Average

May 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 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 Q4

2014 Q3

2014 Q2

2014 Q1

Earnings Growth (Y-O-Y)

-51.04%

-100.00%

33.33%

100.00%

Revenue Growth (Y-O-Y)

-43.32%

-36.02%

-30.60%

-17.88%

Earnings Reaction

23.59%

5.36%

-14.00%

-6.56%

Zynga has seen mixed earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been optimistic about 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

31.05%

30.97%

17.78%

22.93%

26.68%

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

Conclusion

Zynga provides a social game experience to consumers all around the world. The company’s CEO Don Mattrick said that the mobile video game company is about halfway through his turnaround efforts. The stock has been trending higher over the last couple of quarters, but is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been decreasing, which has left investors optimistic. Relative to its peers and sector, Zynga has been a relative year-to-date performance leader. WAIT AND SEE what Zynga does this quarter.

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.

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