Smart Investing


June 8, 2012


Gaming out an investment in Zynga

After watching the pullback in Facebook stock, I grew curious about what Zynga was doing, and whether it would be worth buying after almost six months on the public trading scene.

For those of you who don’t know Zynga (Nasdaq: ZNGA), it develops and markets games on the Internet, social media sites and mobile platforms — names like "CityVille," "FarmVille" and "Mafia Wars" may ring a bell.

This company went public on Dec. 16, 2011, priced at $10 per share. The next day the stock dropped 5 percent, but then, come early March, the stock traded briefly over $14. This was about the same time that the hype on the Facebook (Nasdaq: FB) IPO was hitting the airwaves.

But now that the hype is over, does Zynga make sense as an investment? The stock has a 52-week low of $5.51 and a high of $15.91. The total market value of the company is around $4.4 billion and currently pays no dividend.

The company also currently has no price-to-earnings; investors must remember that information prior to September 2011 was obtained from the prospectus, not by financial statements released under the Securities and Exchange Commission guidelines. Price-to-sales for the company came in at 3.5, very close to the industry average of 3.4 for the industry.

I was pleased to see the price-to-tangible book value for Zynga was 2.9, versus the industry average of 8.3.

Sales for Zynga were up 32.2 percent quarter over quarter, but the industry could only manage 6.3 percent growth for the same period. Earnings per share quarter over quarter fell 6.4 percent, while the industry gained 6.6 percent. Looking into the reason behind this outrageous quarter-over-quarter EPS number for Zynga, I discovered that in the fourth quarter of 2011, the company saw a 200 percent increase in R&D to $445 million, and selling, general and administrative expenses also jumped 45 percent. I’m guessing this is due to the IPO in December. It’s important to note that come first quarter of 2012, both of these expenses dropped back to normal.

When investing into what might be a high-risk company, it’s always comforting to have a strong balance sheet. Zynga has a pretty good balance sheet with a current ratio of 2.2, just under the industry average of 2.4. Zynga has no debt on its balance sheet, which is encouraging; the industry average is 23 percent.

Zynga also has $1.1 billion in cash and short-term investment along with $459 million in long-term investments. Equity has grown nicely over the past year, now coming in at $1.8 billion, and it’s important to note that the company only has $339 million in goodwill and intangible assets.

The cash flow for the company, while positive for the most recent quarter at $79 million, was down $25 million from the first quarter of 2011.

There are quite a few analysts who follow this company, as many as 21 for the year ending December 2013. The mean EPS estimate of those 21 analysts is 37 cents for December 2013, which is a 10 cent increase from the December 2012 estimate of 27 cents. Using a multiple of 20 would put the stock at $7.40 per share. If investors are patient in this volatile market and can pick up shares at $5.50, it would yield around a 35 percent return. Over the last two quarters the company has beaten the quarterly estimate by 67 percent and 20 percent, respectively.

This may have caused the analysts to raise their December 2013 EPS estimate to 37 cents from 36 cents 90 days ago. With this nice earnings growth, this has also helped keep the PEG ratio low at 1.00, demonstrating that investors are not overpaying for the future growth of this company.

So, whether you’re into "FarmVille" or not, the time to look at Zynga as a real investment has arrived. Don’t think that this company is strictly tied to Facebook — it also has connections with Apple (Nasdaq: AAPL) iOS and Google (Nasdaq: GOOG) Android worldwide.

Maybe the decline in Facebook stock has created a buying opportunity for Zynga.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


June 8, 2012