One reason I love idioms is their timeless quality. “History favors the bold” is one that comes to mind when looking at Zynga (NASDAQ:ZNGA). The company was struggling to stay relevant in the online game sector. But Zynga stock has now more than tripled in five years. And a considerable amount of that gain has occurred in the last three months.
From about the middle of 2017 until the end of 2018, Zynga stock was running in place. After a brief jolt in the first half of 2019, the stock continued on its sideways path.
All that changed with the emergence of the novel coronavirus. Like some villain out of a video game, the pandemic changed the daily lives of millions of people. And in the immediate aftermath of shelter-in-place orders, buying video game stocks was like fishing in a barrel.
However the story behind this stock is not exclusively a story about the novel coronavirus. Investors are liking the new, aggressive Zynga.
Zynga Stock Checked All the Boxes During Earnings Season
In the last quarter, many companies were reluctant to deliver any forward-looking statements. But Zynga went above and beyond. Not only did it issue guidance, the company raised its full-year outlook for both revenue and earnings.
Investors also wanted to see companies with plenty of cash on the balance sheet. The latter statement describes Zynga perfectly. At the end of the March quarter, the company had $1.4 billion in cash and short-term assets.
And the company has been managing to increase revenue growth despite seeing a drop in its active user base in the last two years.
Caught in a War of Attrition
Zynga is not dependent on video game consoles. The company has unquestionably planted its flag in the arena of social and mobile gaming. And it has new titles. Notably, a new Harry Potter franchise game should help boost the company’s active user base.
But ultimately I see that as a war of attrition. Yes, I’m personally among the culturally unwashed who has never played Candy Crush, but I don’t have to play it to know it’s popular and highly addictive. My point is that unless you have a “sticky” game like Candy Crush and its multiple spinoffs, it’s hard to see a strategy in which one popular game by a competitor can leave you in a world of hurt.
And that’s why I don’t look at Zynga stock as a pure play on the coronavirus pandemic. But the company doesn’t see itself that way either.
Zynga Goes All In to Reach ‘Peak’ Performance
In June Zynga announced its largest deal ever, a $1.8 billion half-cash and half-stock deal to acquire the Turkish developer Peak Games. The structure of the deal means that Zynga has just removed that cash safety net that value investors like to see.
But the company’s balance sheet should be able to weather a more cash-poor position. Zynga has no debt, and its capital expenses only look to be between $25 million and $30 million. This isn’t a company that’s burning cash.
And that means that the company is counting on its acquisition of Peak Games to deliver aggressive growth. But that’s not the only thing the company has cooking. InvestorPlace’s David Moadel wrote about the company’s expanded partnership with Snap (NYSE:SNAP). Zynga will be developing exclusive games for the company’s Snap Games platform. Plus, Zynga also has a deal with Disney (NYSE:DIS) to produce mobile games that capitalize on the Star Wars franchise.
The Bottom Line: Now We’re Talking
With its acquisition of Peak Games, Zynga has addressed its declining user base problem. In the process, it is now the owner of Peak’s Toon Blast and Toy Blast franchises. And by the looks of Zynga stock, it’s a move that investors have been waiting on Zynga to make. The stock has pulled back since reaching a new high on July 10.
Zynga is expected to report earnings on Aug. 5. By the company’s own admission, there may be a leveling off in the second quarter. But as long as Zynga can climb over a fairly low bar of expectations, it’s not necessarily a bold move to capture shares of Zynga stock while they are trading at a discount.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
