Three years ago, Zynga (NASDAQ:ZNGA) looked like it was on the verge of collapse. Revenue was shrinking, again, and the mobile-game maker’s losses were starting to widen, again. Zynga stock fell to a record low in February of 2016. At that point, investors wondered if the company would ever excite game-lovers again.
In retrospect, savvy investors should have been buying when things seemed their worst. Sales and earnings are growing again. ZNGA stock just hit a seven-year high as a result.
The turnaround is not just impressive, but one worth studying for future reference. This is particularly true for investors who believe mobility is the future of how we will live our lives.
Same, But Different
You know the company, even if you don’t know you know the company. Zynga as the publisher of popular, “casual” games like Farmville, and the very popular Words with Friends. If you’ve played them, you’ve probably did so on a mobile device. You’ve certainly not needed to play them on a hardcore “gaming” computer.
It’s a nuance that matters. While analysts often compare Zynga stock to game developers like Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA), they’re not apples to apples. EA and Activision primarily seek to sell games to serious players. Subsequently, they don’t necessarily remain interested in the game for very long.
On the other hand, Zynga develops games that are easily played, for free, on mobile devices. As a result, the platform encourages repeated plays. Its most relevant competition is an obscure outfit called Glu Mobile (NASDAQ:GLUU).
“Mobile” is a relatively new phenomenon though, around since Apple (NASDAQ:AAPL) launched the mini-computer called the iPhone back in 2007. However, consumers have only recently embraced smartphones as alternatives to broadband-connected computers since the advent of 4G speeds in 2010.
The entire telecom and entertainment industries are still trying to figure out what consumers want. Just as importantly, they’re attempting to decipher what they don’t care about from their wireless broadband-connected devices.
Zynga seems to have gotten a bead on that consumer though, or at least the entertainment-oriented piece of that consumer.
Defining Moment for ZNGA Stock
If you had to define Zynga’s pivot point, you’d refer to March 1st of 2016. That’s when founder and CEO Mark Pincus stepped down as chief for his second and last time, replaced by board member and industry veteran Frank Gibeau.
A couple quarters later, Gibeau was gaining traction. That year’s calendar second-quarter EBITDA of $17.9 million not only topped guidance between $12 million and $16 million, but handily beat analyst estimates of $16.7 million. By August of last year, Gibeau said “We’re moving from ‘fix it’ to ‘grow it’,” adding “2018 is all about live operations. 2019 will be about new games.” In February of this year, the CEO declared “Zynga’s turnaround is now complete.”
He wasn’t kidding. Last year’s revenue of $907 million was up 5% year-over-year, but still accelerating into the end of the year. Its fourth-quarter sales grew 7%. Operating cash flow for the quarter more than tripled to $90 million.
The acceleration continued into the first quarter of this year, with revenue growing 27% to $265 million. Though earnings fell short of estimates, bookings more than doubled to reach $359 million.
Those bookings are a general indication of how well the game publisher will do in the foreseeable future.
Better Games
While Gibeau had put some operational improvements in place, and wasn’t afraid to move some people around, he put his focus on marketing the right games in the right way.
That’s not necessarily an easy detail for the average investor, who may not be a gamer, to spot. However, it’s out there for those who read and listen carefully. The company’s games can be played for long stretches and yet remain interesting. But they can also be enjoyable for short spans. Common examples include waiting for a taxi or a table at a popular restaurant.
They’re also challenging, but not stressful. As such, ZNGA wouldn’t appeal to a fan of Fortnite seeking an intense melee. At the same time, consumers aren’t interested in playing Call of Duty on a small-screened mobile device either.
Speaking about their offerings, Gibeau stated, “All of them are really mass-market games, but they’re also very cool in terms of their design.”
It’s all been by design, even if difficult to articulate.
Looking Ahead for Zynga Stock
Figuring out exactly what “clicks” with mobile device users is a work in progress, mostly because it’s a moving target. Smartphones have become stunningly more powerful than they were just a couple of years ago and will continue to improve. Ditto for tablets and for connection speeds. With 5G likely to send and receive data ten to twenty-times faster than 4G connections, data constraints will go away.
Zynga is also embracing the idea of subscriptions in an increasingly subscription-minded marketplace.
Consumers no longer balk at paying a regularly monthly fee for services like Netflix (NASDAQ:NFLX). Nor do they bat an eyelash at services like Spotify (NYSE:SPOT) nor meal kits like Blue Apron (NYSE:APRN) regularly delivers. Adding access to worthy games wouldn’t be a great leap.
What that might look like when finalized, if finalized, is anyone’s guess. There’s little doubt, however, that if Zynga plows ahead with the opportunity, it will do so with its finger still on the pulse of the mobile-gaming market.
It’s getting very difficult not to like Zynga stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
