Zynga Inc. (ZNGA) is a leading developer of social games that it operates as live services on mobile platforms where these have been downloaded more than four billion times. Users also play Zynga’s social games on social media, personal computer consoles, and other platforms.
Through its platform, Zynga aims at optimizing customers’ engagement through advertisements for mobiles and branded virtual products. Plus, it promotes sponsorships for marketers and advertisers.
The company targets to increase the popularity of its products and services, expanding across the world beyond the current 175 different countries.
Shareholders of Zynga surely didn’t appreciate how the stock performed in the past six months. Zynga dropped almost 40% in the period, lagging far behind the overall market.
Nevertheless, fundamentals are acceptable, and the outlook appears positive. Because of these two factors, the share price should bounce back as long as ZNGA performs in line with expectations. Thus, I am bullish on this stock. (See Analysts’ Top Stocks on TipRanks).
Q3 Earnings Results
Thanks to last year’s acquisition of the hyper-casual gaming portfolio of Rollic, both the average mobile Daily Active Users (DAUs) and the average mobile Monthly Active Users (MAUs) increased on a year-over-year basis in the third quarter of 2021. The DAUs increased by 21% to 38 million, while the MAUs increased by 120% to 183 million.
Rollic is a Turkish developer and publisher of gaming hits such as Go Knots 3D and Tangle Master 3D.
The improvement was so important for Zynga that its total revenues came in at a record $704.7 million, up 40% year-over-year.
While total bookings were the best since the company’s inception, reaching $667.7 million for a 6.3% year-over-year jump.
Excluding one-time charges, total operating costs and expenses were almost unchanged.
The company reported a net loss of $41.7 million (or -$0.04 per diluted share) in the third quarter of 2021. This includes impairments from a leased office that was vacated. Nevertheless, the bottom line improved compared to the net loss of $122.2 million (or -$0.11 per diluted share) for the same period in 2020.
Analysts were expecting a worse net loss of $0.09 per diluted share.
Adjusted EBITDA increased and was more than five-fold higher to $197 million. At the same time, due to the completion of some outstanding earn-out commitments, the operating cash flow went down 12.4% to $99 million.
As of September 30, 2021, the company had $1.3 billion in cash on hand and marketable securities. With a current ratio of 1.25x and an interest coverage ratio of 1.8x, it appears that financial conditions are acceptable.
Target: Growth+
The number of people who love testing their skills in mobile social games is growing very fast. Spending on mobile gaming exceeded $2 billion again in October, for the eighth time in a row, growing approximately 12% so far this year.
Zynga’s strategy to expand the portfolio by enriching it with products and services for mobile phones is logical and forward-looking, given the rapid increase in the adoption of mobile phones as a means of communication worldwide. So, the company will be able to catch growth.
Last October’s acquisition of StarLark, a Chinese developer of golf games for mobile phones, is part of this strategic plan. For this purpose, Zynga withdrew $316 million from its cash balances.
However, this seems to be just the beginning of a series of strategic acquisitions that should follow immediately after the first quarter of 2022. By that time, almost every earn-out payment has been made, so Zynga will be able to allocate a larger part of its cash flow to acquisitions.
The roadmap to growth seems to have already been paved for 2022 and many other years to come.
Looking Ahead to the Final Quarter and Full-Year 2021
For the fourth quarter of 2021, the company projects total revenues to come in at $675 million versus analysts’ average projection of $719.7 million.
For the entire 2021, the company projects total revenues to hover at $2.78 billion versus the analyst’s average projection of $2.82 million.
Wall Street’s Take
Turning to Wall Street, Zynga sports a Strong Buy consensus rating based on 12 Buys and one Hold rating assigned in the past three months. The average Zynga price target is $10.58, implying 63.9% upside potential.
Summary
The company is solidly positioned to grow. Thus, the share price should bounce back.
Disclosure: At the time of publication, Alberto Abaterusso did not have a position in any of the securities mentioned in this article.
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