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Zynga: Ad astra per aspera

Publication Date: 04 Sep 2018 - By Anuj Dhawan By Anuj Dhawan
Actionable
Differentiated

Equity Fundamental Equity USA Technology Consumer

Zynga’s (NASDAQ:ZNGA) claim to fame was its wildly popular game on Facebook, FarmVille. At its peak, FarmVille has over 80 million monthly average users (MAUs). In addition to aligning its games to the growing internet audience of the time, Zynga also benefitted from its founder’s early investments in Facebook. However, the enthusiasm was short lived. In 2012, the recurring spat between the two companies culminated in FB terminating ZNGA’s preferred partner status

Source: ZNGA Financial Model

It is ironic that despite a continual decline in ZNGA’s dependence on FB, ZNGA has been unable to shake off the market perception.

Source: Reuters 

Part of the reason was ZNGA’s founder, Mark Pincus, controlling 70% voting rights on ZNGA’s board. However, this changed in May 2018 with Pincus giving up his preferential voting rights

With MAUs also bottoming out (earlier MAUs were majorly dependent on FB), this rationalisation of shareholder rights has the potential to transform the company’s business. 

 

Source: ZNGA Financial Model

ZNGA’s recent multi-year deal with Disney to develop the mobile game for Star Wars may be the early signs of the imminent change. 

ZNGA’s growing revenue from mobile (~90% of total revenue), increasing focus on Asia (to drive MAU growth) and partnership with FB on developing chat as an additional distribution channel have the potential to radically alter the company's growth trajectory.

Currently, ZNGA trades at a P/S of 3.6x, one year forward, a steep discount to the average of 6.5x for listed gaming companies. At a more intrinsic level, a base case DCF also implies a value of $8 per share vs the current price levels of $4 per share.

ZNGA needs to ensure continuity in management and avoid further run-ins with FB – not much point staring an 800-pound gorilla in the eye. While the path to a turnaround is laden with hardships, a dedicated management focus on execution can lead handsome returns for ZNGA shareholders.

Notes:
•    Historical financials have been sourced from the company's SEC filings and investor presentations.
•    The ZNGA financial model has been built using SEC filings, investor presentations and other publicly available information. To get the model, please contact ReachX.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Anuj Dhawan

 

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