Shares of Zynga Inc. (NASDAQ:ZNGA) are veritably soaring, stringing together two consecutive weeks of bullish momentum. Since bottoming on April 9, ZNGA stock is up over 26%, while year-to-date, its price has risen to a little over 13%.
This is welcome news for the online gaming company, which is undoubtedly eager to overcome the disappointing performance of ZNGA stock since its initial public offering. But is the latest market move for Zynga a flash in the pan, or will its stock eventually succumb to its historically nagging volatility?
Bullish investors and speculators alike received a fundamental boost last week on May 6 when Zynga released its results for the first quarter of 2015.
ZNGA Earnings
The company reported non-GAAP revenues of $183.3 million, exceeding Wall Street’s consensus estimate of $147.7 million. In addition, Zynga posted a narrow loss of 1 cent per share, better than the expected loss of 2 cents. The earnings beat contributing to a 4.4% lift in ZNGA stock on the day of the earnings release.
Unfortunately, not everything was peaches and cream for Zynga, particularly amongst its rank-and-file. Upon releasing the positive financial numbers, the gaming company announced massive layoffs affecting “roughly a fifth of its workforce,” or 364 employees.
The reduction will leave ZNGA with roughly 1,600 employees — less than half of the 3,400 the company had at its peak. The job cuts are an attempt to recover from prior losses incurred, including the Zynga-built data center that cost $100 million, but whose investment apparently failed to spark the necessary returns.
In the meantime, Zynga stock is blowing past its 50 day moving average, a key barometer of market strength.
Analyzing the average performance of ZNGA over the past five weeks, and using the figure as a comparative control, the probability of positive returns within the next five weeks is 60%, with a potential average gain of 13.2%. This suggests that between May 18 to June 15, the average price of ZNGA stock will be a penny shy of $3.
On the flipside, if bullish investors fail to build off of the recent market momentum, ZNGA stock faces a 40% probability of a fairly steep drop averaging nearly 8%. Should that occur, the average price of ZNGA could fall to $2.43 over the next month. In both the bull and bear scenario, the ride will almost certainly be choppy given the stock’s ping-pong nature.
For those that can tolerate the technical risk — along with the fundamental risk of the notorious gaming industry — Zynga makes a seductive case.
In the long-term, ZNGA stock has been supported by a rising trend channel. The current rally has pushed ZNGA past the channel’s upper ceiling, lending credence to the idea that this time, it’s different. More importantly, the stock hasn’t yet definitively violated the channel’s support line.
An investment in Zynga is certainly not for everyone, but for risk tolerant investors, ZNGA stock still has plenty of potential to surprise Wall Street.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
