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Wed, September 30 at 4:00PM ET

Even Out-Performing Zynga Stock Needs a Breather

While ZNGA stock has proven itself, from a current risk-reward perspective, its rivals look more interesting

If we really are headed toward a market downturn, the share price of mobile-gaming specialist Zynga (NASDAQ:ZNGA) isn’t showing it. Since the opening volley of this year, Zynga stock has gained a mind-blowing 56%. Moreover, its recent earnings beat for the second quarter provides a fundamental basis for optimism.

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The gaming firm delivered $73 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Prior to the Q2 disclosure, analysts’ consensus target was $66 million. On a per-share basis, Zynga reported a loss of 6 cents, mitigating management’s guidance for a 7-cent loss.

Just as important, the company stated that its bookings increased 61% year-over-year. Bookings are particularly important in this sector because they represent committed money. In other words, they provide perhaps the best indicator regarding sentiment in mobile gaming. And with such a robust increase, ZNGA stock appears well-positioned for the long haul.

Furthermore, mobile gaming industry forecasts are incredibly favorable to Zynga stock. Sector experts predict that that the global gaming market will exceed $180 billion in 2021. With the company’s trailing-12 month revenue just over $1 billion, in theory, Zynga has room to expand. This potentially gives ZNGA stock a catalyst for a next big run.

Better yet, investors don’t have to depend only on a compelling narrative. The company features 85 million monthly active users. Additionally, it owns strong franchises, such as “Zynga Poker,” “FarmVille,” and “Words With Friends.” In a market segment that relies heavily on attractive content, Zynga stock is currently untouchable.

Thus, it’s curious that following Q2, ZNGA stock encountered some volatility. Should stakeholders be worried?

Why a Breather for Zynga Stock Makes Sense

On surface level, the muted response following Q2 is seemingly nothing to stress over. For one thing, corrections are a healthy component of any bull market. Second, ZNGA stock may benefit from other potential tailwinds.

Primarily, if we suffer a recession, Zynga stock could see a longer-term lift as demand for cheap entertainment pours in. As I argued last month about Roku (NASDAQ:ROKU), people aren’t robots. While Americans love rolling up their sleeves when trouble strikes, they could use escapism and stress-releasing distractions.

I have used this argument for other entertainment stocks as well, such as gaming console makers Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), and cineplex operators like AMC Entertainment (NYSE:AMC).

But where I get a little bit concerned is the volatile nature of mobile gaming. While we stand in awe of Zynga stock, its rival Glu Mobile (NASDAQ:GLUU) presents an entirely different narrative. On a year-to-date basis, GLUU is down 34%.

That said, while the fundamentals support ZNGA stock, they also justify the bearishness toward GLUU. Zynga’s rival produced a disappointing earnings report for its Q2. Specifically, investors absolutely hated management’s downgrade on their bookings. Currently, Glu estimates that their full-year bookings will fall in somewhere between $406 million to $410 million. Previously, they guided $445 million to $455 million.

Of course, this has nothing to do with Zynga stock, except that it does. As The Motley Fool’s Harsh Chauhan noted, Glu’s downfall demonstrates how fickle this industry is. If you produce a winning game, life is beautiful, as you can see from ZNGA’s chart. But if you miss, we also have a real-time case study to consult.

With this in mind, a little profit-taking from Zynga stock would seem prudent.

ZNGA Alternatives Appear More Attractive

Please don’t read this message wrong: ZNGA stock has more than proven itself. But it’s also a time to get practical and tactical. As we witnessed with Glu Mobile, it doesn’t take much to kill investor sentiment in this arena.

Moreover, GLUU benefits from the same broader undercurrents guiding this market subsegment. With its own attractive franchises, as well as some new titles coming up, GLUU has a solid chance to grab share in this potential $180 billion-plus market.

Therefore, we have two basic ways to approach Zynga stock. If you own a substantial position, securing some of those profits into strength makes sense. But if you’re just tuning into this opportunity, I’d wait. For now, its rival offers the better risk-reward profile seeing as how much of the ugliness is already priced in.

As of this writing, Josh Enomoto is long SNE and AMC.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/even-out-performing-zynga-stock-needs-a-breather/.

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