$ZNGA Soars Above Cash and Book Value After Beating Estimates, Real-Money Online Gaming Potential

$ZNGA Soars Above Cash & Book
(Draw Something via Flickr)
The main reason why ZNGA started to look like a value play at the end of 2012 was because it was trading near its cash value and below its book value. Groupon (GRPN) was a similar play as well at that time (follow up). I've been following Zynga (or watching it crash) ever since it went public at $10. It is now down 68% from its IPO price.

ZNGA's Price/Cash and Price/Book Ratios Spike

After ZNGA reported lower revenue, lower quarterly bookings, a huge writedown on its OMGPop acquisition, and another loss in Q3 2012, the company decided to cut underperforming games and jobs. This shake up and uncertainty sent the stock down to $2.12, which was valuing the company at 1.19x cash (or 0.98x cash when using $1.64 billion of cash, cash equivalents and marketable securities ending Q3 2012) and 0.868x book value. Zynga had (and still has) $100 million in debt. So the market was saying there was hardly any value left in its gaming operations.

But Zynga's better than expected Q4 numbers and speculation on real-money gaming caused shorts to cover and buyers to emerge. Today the company is trading at 1.91x cash and short-term investments (or 1.52x $1.65 billion of cash, cash equivalents and marketable securities ending Q4 2012 from Zynga's release) and 1.374x book (ychart below).

ZNGA Book Value Chart

I mainly wanted to point out in this post that the spread between Zynga's stock price (market cap) and its cash and book value widened significantly since November. It was (like Groupon) simply a value play based on its price/balance sheet ratios at the time. This doesn't mean that things can't change materially over the next year.

Real-Money Online Gaming Outlook

After it hit $2, on December 5, 2012, Zynga announced that they "filed a preliminary application to run real-money games in Nevada" (Reuters). TechCrunch mentioned in December that Zynga might have to partner with a casino to obtain its gambling license. On February 7, 2013, I remember ZNGA rallied when New Jersey Governor Chris Christie vetoed a bill that would legalize internet gambling, but said "he would sign it if it had a 10-year trial period and a higher tax rate on casinos" (ABC News). And according to OnlinePokerNews, a bill in Pennsylvania could soon "legalize online poker and other potential online casino games." According to Delaware Online, "Delaware remains the only state to have legalized full-fledged online gambling." This is the reason why Zynga recently bought "dozens of game patents with an emphasis on gambling" (AllThingsD).

Zynga has already made a significant move in real-money online gaming in the UK by partnering with bwin.party. On October 24, 2012, Zynga officially announced their partnership.

"Zynga Partners With bwin.party to Launch Real Money Games in the UK

SAN FRANCISCO, Oct. 24, 2012 (GLOBE NEWSWIRE) -- Zynga (Nasdaq:ZNGA), the world's leading provider of social game services, and bwin.party, the leading international real money gaming operator, today announced an exclusive partnership to offer real money online Poker and Casino games in the UK market. Zynga's UK-based RMG service and bwin.party will launch RMG products including Poker and a full suite of 180 Casino games in the first half of 2013, which include table games such as slots, roulette and blackjack.

"Bringing together Zynga's expertise in social gaming with the top international real money gaming operator is the best way to create the highest quality gaming experiences for our players in the UK," said Barry Cottle, Executive Vice President, Corporate and Business Development, Zynga. "Partnering with an established leader like bwin.party is a strategic and prudent way for us to enter a key RMG market while giving local players the real money games they've been asking us for."

"Today's announcement is another example of our success in leveraging our assets through strategic blue-chip partners," said Jim Ryan and Norbert Teufelberger, Co-CEOs of bwin.party. "Zynga is the world's leader in social games with hundreds of millions of active players worldwide and a significant player base in the UK. We are delighted to have been selected as their chosen partner for this important step in their evolution, and hope to expand our relationship into other products and markets."

Zynga's real money UK poker customers will join the bwin.party dotcom player liquidity pool — getting the benefits of playing on the largest regulated poker network. Zynga's UK-based RMG service will be powered by the established operating platform, software, and related support of bwin.party.

In addition to the full suite of Casino and Poker games, Zynga's UK-based RMG service will also leverage the company's world renowned entertainment brand, FarmVille, to offer local players the first-ever, online FarmVille-branded real money slots game.

Zynga's UK-based RMG service will operate under bwin.party's Gibraltar gaming license."

AllThingsD also confirmed that Zynga is planning to bring real-money gaming to Facebook in the UK. So since real-money gaming is a significant revenue opportunity for Zynga, I think investors realized this and started to buy the stock and/or cover their shorts. But it will take time to realize all of this value. They acknowledged this at the Goldman conference a few days ago.

"In the U.S., what I would say is we went and filed an application which is basically the first step in a process for Zynga to be an operator in the state of Nevada. And you know it's a first step, and you hear a lot of news around this area, but it's all about just getting alignment in case the U.S. opens up at some point in the future. We don't think that's a 2014 opportunity, for example."

Technical Analysis: October Capitulation, July Gap and 200DMA

When Zynga lowered its Q3 bookings outlook in early October 2012, ZNGA crashed to $2.21 and closed $2.48 on very strong volume. That was actually its biggest volume day ever, so it seemed like capitulation to me. It was still respecting its downtrend line at that time, so that was the line in the sand to watch along with $2.67-$2.70 ceiling resistance. As you can see in the chart below, ZNGA ended up gathering upside momentum at the beginning of 2013, held on to its 50 day moving average and new uptrend line, and broke out at the end of January/beginning of February. It then rallied all the way up (or close to) its 200 day moving average of $3.75 before selling off at overbought levels.

ZNGA's overall strength looks good, but its relative strength index (RSI) hit close to 80 at its peak, which, combined with 200DMA resistance, is why ZNGA is off 14.6% from its high. I think ZNGA will eventually fill that July 2012 gap, but I couldn't tell you the exact time frame or best entry point after this nice rally from November. To put Zynga's stock price in perspective, every point gain equals an additional $800 million in market value.

Zynga's 4th Quarter Revenue, Bookings and Earnings Beat Expectations

According to Mashable, Zynga ended up beating its Q4 estimates and Q1 2013 guidance:

"The gaming company reported earnings per share of $0.01 on revenue of $311.2 million in the December quarter, coming in well ahead of Wall Street's consensus estimate for EPS of -$0.03 on revenue of $212 million. Zynga also reported bookings of $261.3 million for the quarter, beating estimates of $222.4 million.

This, combined with better-than-expected guidance for the first quarter of 2013, helped push the stock price up by as much as 7% in after hours trading."

Zynga's quarterly revenue has been trending down since Q2 2012, and it's been reporting a quarterly GAAP loss ever since it went public. But its quarterly bookings were up sequentially. Here's a breakout of Zynga's revenue form its earnings release and a historical chart from Statista.

"Revenue: Revenue was $311.2 million for the fourth quarter of 2012, flat compared to the fourth quarter of 2011 and a decrease of 2% compared to the third quarter of 2012. Online game revenue was $274.3 million, a decrease of 3% compared to the fourth quarter of 2011 and a decrease of 4% compared to the third quarter of 2012. Advertising revenue was $36.8 million, an increase of 35% compared to the fourth quarter of 2011 and an increase of 19% compared to the third quarter of 2012."

Zynga's revenue from Q1 2009 to Q4 2012
Find more statistics at Statista

Zynga reported a Q4 GAAP net loss of $48.56 million and Non-GAAP net income of $6.9 million. As you can see in the chart, Zynga hasn't reported a GAAP profit since Q3 2011.

Zynga's net income (loss) from Q1 2009 to Q4 2012
Find more statistics at Statista

Zynga's Q4 bookings were at $261 million, down 15% year-over-year ($307 million in Q4 2011) and up 1.95% from $256 million in Q3 2012.

Source: Zynga

Here's another look at Zynga's quarterly revenue and GAAP net income since 2010.

ZNGA Revenue Quarterly Chart

Highlights from Zynga's Q4 earnings release:

  • Daily active users (DAUs) increased from 54 million in the fourth quarter of 2011 to 56 million in the fourth quarter of 2012, up 3% year-over-year. On a consecutive quarter basis, DAUs were down 6% from 60 million in the third quarter of 2012.
  • Monthly active users (MAUs) increased from 240 million in the fourth quarter of 2011 to 298 million in the fourth quarter of 2012, up 24% year-over-year. On a consecutive quarter basis, MAUs were down 4% from 311 million in the third quarter of 2012.
  • Monthly unique users (MUUs) increased from 153 million in the fourth quarter of 2011 to 167 million in the fourth quarter of 2012, up 9% year-over-year. On a consecutive quarter basis, MUUs were down 6% from 177 million in the third quarter of 2012.
  • Average daily bookings per average DAU (ABPU) decreased from $0.061 in the fourth quarter of 2011 to $0.051 in the fourth quarter of 2012, down 17% year-over-year. On a consecutive quarter basis, ABPU was up 8% from $0.047 in the third quarter of 2012.
  • Monthly Unique Payers (MUPs) were 2.9 million in the fourth quarter of 2012, down 1% year-over-year and down 2% quarter-over-quarter.
  • Zynga released six new titles during the fourth quarter of 2012, including four new titles on web-based platforms: Bubble Safari Ocean, CityVille 2, CoasterVille and The Friend Game; and two new titles on mobile platforms: Ayakashi and Party Place. In addition, Zynga launched mobile versions of Bubble Safari and Ruby Blast.
  • As of December 31, 2012, Zynga had five of the top 10 games on Facebook, based on DAUs as reported by AppData, including some of its most established titles, Words With Friends and Zynga Poker, and some of its newer games, Bubble Safari, ChefVille and FarmVille 2.
  • In the fourth quarter of 2012, Zynga continued to expand its platform offering for third-party publishers, launching eight web games and four mobile games.
  • In December 2012, Zynga mobile game players in the US spent more time in Zynga games than the next five game companies combined, according to comScore."
  • Share Repurchase Program: As of December 31, 2012, Zynga repurchased approximately 5 million shares of common stock under its stock repurchase program. The remaining authorized amount of stock repurchases that may be made under this plan was approximately $188 million as of December 31, 2012."

Zynga's Q1 2013 guidance:

source: Zynga

Previous Posts:

Zynga Files Preliminary Application to Run Real-Money Gambling Games in Vegas (Reuters) (December 5, 2012)
$ZNGA is Trading Below Book, Around Cash, and Has a $200 Million Share Repurchase Program (November 12, 2012)
Zynga's Stock Crashes After Lowered Q3 Bookings Outlook ($ZNGA) (October 7, 2012)
ZNGA: Zynga Crashes in After Hours Trading; Draw Something Expectations Lowered (July 25, 2012)

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