Should You Buy Zynga Stock? 3 Pros, 3 Cons

Advertisement

Zynga (ZNGA) stock has many investors wondering if it has finally hit a bottom. For them, the past few months have been nothing but a series of delayed game launches and consumer snubs, not to mention a gut-wrenching drop in bookings. After seeing its market value fall nearly 50% since March when shares were approaching $6, the stock is in danger of becoming a falling knife.

zynga stock, zngaBut if you look closely, you’ll find traces of a silver lining in Zynga, including the recent mobile launches New Zynga Poker and NFL Showdown. If you see the glass half full, you may view the beat-up shares as a buying opportunity. But don’t count your virtual currency just yet.

Here are three pros and three cons for Zynga stock.

Zynga Stock Pros

Pipeline: Zynga has a solid pipeline of new games to be unveiled over the next several months. In addition to the new football game, Zynga partnered with Tiger Woods for an expected 2015 mobile golf game launch. A Looney Tunes runner game is also expected to make its debut in time for the holidays. Even if you’ve doubted Zynga, you have to admit that the company has provided a clear window into potential catalysts that could drive the stock price higher in 2015.

Balance Sheet: Don’t look now, but Zynga has a pretty solid balance sheet. With a billion plus in cash and marketable securities, Zynga should have everything it needs to develop the next hit game. That cash will also allow Zynga to remain debt-free as it spends on R&D.

Don Mattrick: If anyone can drag Zynga stock out of the doldrums, it will be Don Mattrick, who was appointed as chief executive last year. Mattrick is a Microsoft (MSFT) alum who comes from the gaming-console world where he spearheaded the Xbox division. Perhaps more important is that he has a real, defined strategy for Zynga. That game plan is two-pronged, involving mobile and innovation. Mobile bookings are on track to comprise more than 50% of Zynga’s overall bookings in 2014. Meanwhile, the forthcoming NFL and Tiger Woods partnerships are steps in the right direction. The board has faith in the CEO, evidenced by Mattrick’s $57.8 million compensation package formalized in June.

Zynga Stock Cons

Lower Bookings: Users have demonstrated less of a willingness to pay for virtual goods, evidenced by a decline in Zynga’s bookings (virtual goods sales and ad services) from $1.15 billion in 2011 to a recently lowered projected range of $695 million to $725 million for 2014. Zynga no doubt has carved out a tough niche for itself, offering free games through its Farm, Casino and Words franchises, for instance, while noting in the 2013 annual report that  the “primary revenue source is the sale of virtual currency that players use to buy in-game virtual goods.”

Competition: Consumers are flocking toward more traditional games, evidenced by some impressive numbers for gaming consoles. Pre-orders for Activision Blizzard’s (ATVI) Destiny intellectual property have reportedly reached record heights at retailer GameStop (GME). Meanwhile, Sony’s (SNE) PlayStation 4 console is setting records of its own, having sold more than 10 million units in recent weeks. And console games aren’t the only one sucking screen time away from ZNGA. Adding insult to injury for Zynga, Glu Mobile’s (GLUU) Kim Kardashian mobile game is doing quite swimmingly, evidenced by the $200 million in annual revenue the game is projected to generate.

Shareholder Value: There hasn’t been any of late. Zynga stock is basically sitting at its 52-week lows, and the company as noted is sitting on $1.1 billion in cash. Yet you won’t see a ZNGA buyback a single share or distribute a penny in dividends. For now, company management is merely “evaluating” ways to reward shareholders, according to CFO David Lee on the second-quarter earnings call. Investors had better hope the NFL and Tiger Woods partnerships pay off, because that might be where their value is tied up.

Bottom Line

ZNGA isn’t for the faint of heart because of the volatility that’s inherent with faddish games. Zynga stock is only as good as its latest franchise, and for now there’s uncertainty surrounding whether there will be a next mega hit. Mattrick is a bright spot, but if he has boarded a sinking ship, there’s not a licensing deal out there that matters.

ZNGA is just too much of a gamble, especially when there are other stocks out there in the space that are faring much better. For now, the cons still outweigh the pros for Zynga stock.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/zynga-stock-znga-pros/.

©2024 InvestorPlace Media, LLC