Everyone laughed at this stock when it first came out…
Farmville on Facebook!! Clearly that isn’t a sustainable long-term business…
But now, what do you know? There are signs of life at Zynga.
Especially in the stock.
Zynga shares are up 75 percent in half a year… and that increase isn’t being driven by hot-air or hype.
This share price increase is being driven by very real financial performance.
Revenue and EBITDA are growing rapidly – plus the company has just increased guidance for 2019 from what were already record revenue bookings.
Zynga is not being laughed at anymore.
Many investors are starting to think of Zynga as a high-margin growth story.
Five “Forever Franchises” And More In The Pipeline
The business that Zynga is in as a provider of social game services.
These are the games that are played on mobile platforms like Apple’s iOS, Google’s Android on social networking sites such as Facebook.
Social gaming is a big business – in the U.S. the social gaming industry generates more than $2 billion in revenue per year and keeps growing.
Do not make the mistake in thinking that social gaming is teenage thing. The average player/user is actually close to 40 years old and has money to spend.
Revenue comes from sale of in-game virtual items as well as advertising. Zynga also earns revenue from players opting to purchase advertisement-free versions of the games.
Most players don’t spend anything – but the ones that do spend a lot.
While spending money on social gaming might seem like a waste to you or me….
With the number of hours that many people spend playing these games they actually offer good value for money.
Basically what it boils down to is that a social gaming business like Zynga lets you play the games for free – but a more enjoyable version of the game is available at a price.
Zynga’s specific game portfolio is anchored by what it refers to as its “five forever franchises” – with a “forever franchise” being defined as a game that can last for 5 or more years and deliver >$100 mil in bookings per year.
I guess in this internet age “forever” equals five years.
After a couple of recent acquisitions the “five forever franchises” are CSR Racing, Empires & Puzzles, Merge Dragons!, Words With Friends and Zynga Poker.
With Empires & Puzzles, Merge Dragons! and Words With Friend all posting excellent first quarter results Zynga has raised full year 2019 guidance to $1.2 billion in revenue.
That is a 32% year-over-year improvement and an increase of $50 million versus prior 2019 guidance.
The business is generating big dollars and growing quickly.
Zynga also has a strong new game slate over the next several years with at least 8 new games launching. Since forever only lasts for five years in this industry it is important to have at least a couple of these new games hit.
Two Recent Acquisitions Put The Zip Into Zynga’s Stock
As one of the largest social gaming companies on the planet Zynga has the financial firepower to roll-up smaller operators.
The run in Zynga’s stock over the past 6 months can be tied directly to two recent acquisitions.
A one or two game company is never going to get the valuation that major and diversified business like Zynga does – that allows Zynga to take out smaller players at attractive valuations.
Then have the acquired revenue/earnings revalued at Zynga’s higher multiple.
But there is more to Zynga’s successful acquisitions than just financial engineering. There are also big benefits in adding smaller social games to the Zynga portfolio.
With its much larger base of gamers Zynga can cross promote newly acquired games across its existing game base to draw in new players. Cross-promotion is the primary marketing tool in this industry.
The bigger your gaming base the more powerful your marketing machine.
We don’t have to look far back for proof of how well this works.
Zynga purchased Gram Games in May 2018 and Small Giant Games in December 2018.
When purchased – those companies were on annual revenue run-rates of $120 million and $200 million respectively.
By plugging those games into the Zynga’s live service and user acquisition infrastructure the Zynga has been able to accelerate these revenue run-rates to $200 million and $320 million respectively in 1Q19.
Those are revenue increases of 66 percent and 60 percent from the pre-purchase level with minimal spending required.
That is a recipe for success – and those big revenue uplifts happened in a hurry. Just a matter of a few months.
The success of these recent acquisitions have also made Zynga a desirable acquirer for sellers – and the company just came into some serious cash to work with to keep on acquiring.
In July Zynga will receive $600 million of cash from the sale of its wholly owned office building in San Francisco. That will give Zynga $750 million of cash to play with.
Combined with some issuance of Zynga stock the company could add several smaller gaming companies.
Currently analysts expect Zynga’s EBITDA to scale up like this:
2018 EBITDA Actual: $190 million
2019 EBITDA Estimate: $290 million
2020 EBITDA Estimate: $350 million
That is 50 percent growth in 2019 and another 22 percent in 2020 – combined for an 83 percent increase in 2020 from what was posted in 2018.
The stock is currently trading at 14 times 2020 EBITDA. That strikes me as attractive given the rapid rate of growth that is expected.
If Zynga can complete another couple of successful acquisitions perhaps growth can be even better than expected…
EDITORS NOTE: The Trade Desk – TTD-NASD – is one of, if not THE largest ad sales group on the Internet now – and the stock has more than doubled in 2019. It’s trading at 17x Sales!! I have found a junior stock in the same business ($100 M revenue this year!) that’s growing faster and trades at just 1x sales. ONE. I see this stock as having FANTASTIC UPSIDE – get the name and symbol of this stock, RISK-FREE – right HERE.