The market for casual mobile games is getting bigger — it’s on track to be worth $68.5 billion by the end of the year. That has played out well in 2019 for American social game developer Zynga (NASDAQ:ZNGA).
The company made several acquisitions in 2018 to grow its presence and revenue, which have been boosted significantly as a result. The gains there have helped power Zynga stock to 57% growth on the year.
That’s impressive, but the big question for investors is whether the company (and its stock) can maintain the momentum.
Lucrative Mobile Gaming Market
The value of the mobile gaming market has risen dramatically in tandem with the popularity of smartphones. In 2012, it was estimated to be worth $7.8 billion, globally. This year, mobile games are on track to generate $68.5 billion, with most of that being accounted for games downloaded on the over 3 billion smartphones in use globally.
Zynga got its start producing causal games such as FarmVille that could be played on Facebook (NASDAQ:FB). That early success led to an IPO and the Zynga stock price that was climbing toward $15 by early 2012. However, the company was late to recognize the growing importance of mobile apps, and that dependence on Facebook ended up being costly. ZNGA stock dropped over 85% in less than a year after the social media giant took steps to monetize gaming on its platform. Zynga then made the move into casual mobile gaming with apps like Words With Friends.
In the latest quarter, Zynga reported $345 million in revenue — up 48% over the previous year, and 95% of that through mobile apps. After years of slow recovery from its 2012 crash, ZYNGA stock has put together an impressive 59% run in 2019.
Bigger Fish Than ZNGA
While the rapidly-growing market for mobile games has provided opportunity for Zynga, it has also brought risk. When a market is worth that much, it attracts much larger competitors. The mobile gaming market is now dominated by giants like Supercell (Clash of Clans) and Niantic (Pokémon Go). Chinese companies like Tencent are also huge players in the market.
In addition, the lucrative mobile gaming market has drawn in traditional video game companies like Electronic Arts (NASDAQ:EA), and Activision Blizzard (NASDAQ:ATVI) spent $5.9 billion in 2016 to buy King Digital.
2019 has seen one of the biggest developments in the mobile gaming market with the launch of Apple’s (NASAQ:AAPL) Apple Arcade. Subscribers pay $4.99 per month for unlimited access to over 100 premium games, with no in-app purchases allowed. If this model gains ground, it puts the free-to-play business model of companies like Zynga — that relay on in-app purchases for revenue — on notice.
Acquisitions to Grab Market Share
As happens when a market takes off and bigger companies move in, Zynga has made some key acquisitions. Those have helped fuel the performance of Zynga stock in 2019.
In 2018 the company acquired Gram Games and announced a $560 million deal to purchase an 80% stake in Small Giant Games. The latter deal closed earlier this year, adding the popular Empire & Puzzles game to Zynga’s roster. Small Giant Games was reporting 50 million downloads and $130 million in annual revenue for its games.
These purchases have helped to boost Zynga’s revenue in 2019, representing a big part of the momentum in ZNGA stock growth over the past year.
Analysts Like Zynga Stock, But…
Zynga’s performance in 2019 combined with its potential for growth has impressed investment analysts. CNN Business polled 16 analysts, and they have ZNGA stock as a consensus “buy,” with a $7.50 median 12-month price target. If they’re correct, that represents upside of over 21%. That’s not as dramatic as the Zynga stock performance over the past year, but it would still be a decent gain.
Without any more blockbuster deals to suddenly bolster its number of users and revenue, Zynga will be relying more on organic growth in 2020. There’s room for that to happen, but with fierce competition and the potential for Apple Arcade to disrupt the mobile gaming market, another year near 60% growth is not in the cards.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
