With shares of Zynga (NASDAQ:ZNGA) trading at around $3.19, is ZNGA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
Zynga has been the butt of many jokes recently. Is this reputation justifiable? We'll take a look at many different factors and then form an opinion. We'll begin with traffic. Zynga's traffic has declined considerably over the past year. While there might be good excuses for this decline, they're still excuses. Over the past three months, pageviews have declined 13.37 percent. That's not terrible, but it's certainly not a plus. The good news is that time-on-site has increased 1 percent, and the bounce rate has declined 3 percent. In regards to current rank, Zynga ranks #893 globally and #840 in the United States.
According to HelpOwl.com, gamers have given Zynga a 2.38 of 5 rating, which is subpar. The most common complaints are poor customer service, unhappiness with changes to existing games, and game crashes.
According to Glassdoor.com, the company culture is average. Zynga has received a 3.1 of 5 rating, and 53 percent of employees would recommend the company to a friend. There are passionate reviews from both sides. Employees seem to either love or hate their job. Therefore, the company culture can't be classified as great.
Let's take a quick look at some positives and negatives for Zynga.
Positives:
Recently beat earnings expectations Real-money gaming potential Filed for gambling license in Nevada Strong balance sheetNegatives:
Slowing revenue growth Lacking profits Cautious guidance 30 percent decline in bookings last quarter Fierce competition, including established casino brands entering arena Weak margins Analysts don't favor the stock: 2 Buy, 18 Hold, 3 Sell (this is rare)The chart below compares fundamentals for Zynga, Majesco Entertainment (NASDAQ:COOL), and Facebook (NASDAQ:FB). Zynga has a market cap of $2.40 billion, Majesco has a market cap of $23.88 million, and Facebook has a market cap of $66.15 billion.
| ZNGA | COOL | FB | |
| Trailing P/E | N/A | N/A | 1851.27 |
| Forward P/E | N/A | 29.50 | 35.60 |
| Profit Margin | -9.80% | -5.87% | 1.04% |
| ROE | -6.59% | -17.87% | 0.64% |
| Operating Cash Flow | $143.40 Million | $5.48 Million | $1.61 Billion |
| Dividend Yield | N/A | N/A | N/A |
| Short Position | N/A | 1.00% | 7.50% |
Let's take a look at some more important numbers prior to forming an opinion on this stock.
E = Equity to Debt Ratio Is Strong
The debt-to-equity ratio for Zynga is stronger than the industry average of 0.10.
| Debt-To-Equity | Cash | Long-Term Debt | |
| ZNGA | 0.05 | $1.27 Billion | $100.00 Million |
| COOL | 0.00 | $26.76 Million | $0 |
| FB | 0.20 | $9.63 Billion | $2.36 Billion |
T = Technicals Are Mixed
Zynga has been a big loser over the past year, especially considering the strength of the market. However, the stock has performed very well year-to-date.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| ZNGA | -4.46% | 36.02% | -62.32% | -1.83% |
| COOL | 9.91% | -43.49% | -75.35% | -32.69% |
| FB | 8.68% | 4.43% | N/A | N/A |
At $3.19, Zynga is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.
| 50-Day SMA | 3.39 |
| 100-Day SMA | 2.99 |
| 200-Day SMA | 2.96 |
E = Earnings Have Been Weak
Zynga has a difficult time delivering profits. Revenue has consistently improved on an annual basis, but the rate of growth has slowed considerably.
| 2008 | 2009 | 2010 | 2011 | 2012 | |
| Revenue ($)in millions | N/A | 121.47 | 597.46 | 1.14B | 1.28B |
| Diluted EPS ($) | N/A | N/A | 0.11 | -1.40 | -0.28 |
When we look at the previous quarter on a year-over-year basis, we see a significant decline in revenue but an improvement in earnings. The same can be said on a sequential basis. Many companies have inconsistent earnings, and some have small setbacks in revenue, but this type of revenue setback is a potential red flag.
| 3/2012 | 6/2012 | 9/2012 | 12/2012 | 3/2013 | |
| Revenue ($)in millions | 320.97 | 332.49 | 316.64 | 311.16 | 263.59 |
| Diluted EPS ($) | -0.12 | -0.03 | -0.07 | -0.06 | 0.00 |
Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
T = Trends Might Support the Industry
Many states are broke. They will eventually look for any avenues possible to increase revenue streams. One of those avenues will be to legalize online gambling. This will be a plus for the industry, but it won't necessarily be a plus for Zynga. If this environment presents itself, then there will be many big players looking to get involved, and Zynga will be nothing more than an ant attempting to survive a marching band at a parade.
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Conclusion
Zynga was given a WAIT AND SEE rating the last time it was written about in this column. However, after delving a little deeper and reading gamer reviews, that rating will have to be downgraded. As far as poker goes, the potential is good, but it's still just potential. FullTilt had a lot more than potential and it failed miserably. Many other poker sites have also failed. Furthermore, Zynga's revenue growth has slowed considerably, the company culture isn't great, traffic has declined, and profits are harder to find than Waldo while reading by candlelight. Aside from real-money gaming potential (not just poker), there isn't much to like.
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