Zynga Inc Stock Offers An Opportunity To Value Investors?

  • Zynga stock has fallen more than 75% since its IPO.
  • With no debt and nearly a billion dollars of cash, investors can find a good value play in Zynga.
  • If the new CEO can create a catalyst, the undervaluation can lead to an exponential jump in the stock price.

With its IPO priced at $10 per share back in December of 2011, Zynga (NASDAQ:ZNGA) has fallen more than 75% since. Inconsistent revenues, negative margins, and a declining user base have dragged the company down to alarming lows. However, Zynga still carries a very strong balance sheet and is trading only slightly above its book value, which consists of a high level of cash. With a new CEO and a cheap valuation, now is a good time to keep an eye on the Zynga stock.

ZNGA stock chart

Source: Zynga Stock Price Chart by amigobulls.com

Strong Balance Sheet

Zynga’s liquidity is not quite as bad as you would expect for a company that has been performing at a negative operating margin. With $742 million in cash, Zynga has a very strong cash ratio of 3.1. This is still enough cash to get them by for a while. In 2015, Zynga had an operating loss of $146 million, which is a 40% reduction from the year prior. So, with $742 million in cash and low liabilities, and also without any long-term debt, Zynga’s balance sheet is well positioned against its consistent net losses.

Valuation

At a $2 billion market cap, Zynga is trading at a price-to-book ratio of 1.1. That’s very attractive considering nearly a billion dollars of their book value is comprised of cash. With large cash and no debt, Zynga would be a great acquisition target. And with a clean balance sheet like they have, it is not hard to see the value in Zynga. At 2.7X sales, they are trading below the industry average of 4.2 but rightfully so. Zynga is underperforming against the industry in margins and growth, and therefore should be trading at a discounted sales ratio. However, it does not negate their book value, which carries no debt and substantial cash, which means the company is well positioned for any future funding or capital needs.

The Problem

Zynga tumbled due to poor performance. Revenue for 2015 was $765 million, down from $1.28 billion in 2012, and has been accompanied by a decline in its user base. The company has been unable to post positive operating income and had an EPS of - $0.13. Although Zynga has the cash to back up its valuation, they don’t have a catalyst to drive their value higher. Too much inconsistency across its top and bottom line drove Zynga stock to all-time lows.  Now the challenge is in finding a catalyst to drive this stock back up to a more reasonable trading price.

The Good News

With such strength in their balance sheet, it is unlikely for this stock to go much lower right now. They have a new CEO, Frank Gibeau, who has a long work history with Electronic Arts (NASDAQ:EA). 2015 was an up year for Zynga, and if this is a sign of another uptick in top and/or bottom line growth in the quarters ahead, then 2016 can be a very profitable year for investors. Right now it is still a little too early to pinpoint what the exact catalyst will be to drive this stock higher, but I believe that any catalyst that would move this stock upwards would be amplified by the current undervaluation, therefore yielding significantly higher returns.

Conclusion

There is no question that Zynga’s core business has fallen off track and it needs to wake up again. However, the company has more than enough cash and more will come as the company has put its headquarters for sale, which they purchased back in 2012 for $228 million. With a pristine balance sheet, a new CEO, and a market cap of $2 billion, I would keep a close eye on Zynga stock.

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Comments on this article and ZNGA stock

user profile picture
johndingle1
bullish
I would agree.. with 8 more games slated for release this year and some secret labs development work.. The turn around could be in.
5 4 reply
user profile picture
chaffandee
neutral
Zynga pulled the plug on mafia wars, If your holding stock. watch your shares plummet . Zynga ended the money coming in from the 7 year play time players. you have been told,check out the feeds on facebook, they all stopped paying...messgae from...SOSA Bully Beater...ps..Transmission ends ( SMEGGARS WAZ ERE )
2 reply
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