Summary:

Zynga’s stock popped as high as $4.50 last month after a rumor went around that it was a potential acquisition target. The stock has since retreated down to $3.60 levels.

Rumor or not, Zynga’s strong balance sheet and large presence in social poker and slots games makes it a very attractive buyout target.

China’s more stringent policy over video games means Tencent and/or NetEase needs to acquire international gaming outfits like Zynga to find new growth opportunities.

Zynga is now profitable and has a reliable moat from its poker and slots social video games. Upcoming Star Wars, Harry Potter, and Game of Thrones can boost its revenue.

Go long ZNGA only if you plan to hold it for a long time. I Know First has a bullish 1-year market trend forecast for this stock.

The article was written by Motek Moyen Research – Senior Analyst at I Know First

Zynga’s (ZNGA) strong balance sheet and leadership position in social/mobile poker and slots games makes it a good long-term investment. This buy recommendation still holds true even if last month’s rumor of Zynga being a potential takeover target never becomes a reality for the next 12 months. What matters most is that Zynga is one of the leaders in the growing social casino gaming industry.

The 22 million daily active users of Zynga Poker makes it one of the most important social casino games in the world. Zynga still has more than $400 million in cash & short-term investments it can use to increase its presence in the $4.17 billion/year global social casino gaming business.

(Source: Statista)

Zynga Poker’s longevity and continuing profitability is reason enough to go long on ZNGA. Zynga Poker remains the world’s no.1 online poker platform. It has far more daily active users than real money poker sites like PokerStars or PartyPoker. Zynga makes money by selling virtual poker chips for real dollars. Zynga Poker’s revenue stream might double up once it becomes Virtual Reality-friendly. It is my fearless forecast that online social casino games can offer real-world like casino experience if people can play them using Virtual Reality headgears.

Why Zynga Is Attractive To Bigger Video Gaming Firms

ZNGA shot up as high as $4.50 in early October due to the rumor of it being a takeover target. The stock has declined to $3.62. This could be a reasonable buy-in window to bet on the growing opportunity in social casino games. Further, the buyout rumor might just prove true next year. Takeover or merger negotiations cannot be finished in two or three months.

I suspect that possible suitors for Zynga will be Chinese firms like Tencent (TCEHY) (TCTZF) and NetEase (NTES). These two giants of the video games industry need new sources of revenue. The Chinese government’s crackdown on video games means Tencent and NetEase has very limited growth opportunity inside China. Zynga’s international population of paying gamers can help Tencent and/or NetEase increase their non-China revenue streams.

My guesstimate of Zynga’s takeover price is $4.4 billion, 27% higher than the company’s current market cap of $3.43 billion.

Why Zynga Is Worth At Least $4.4 Billion

The growing social casino games industry is why a Jack Ma-backed Chinese consortium bought social casino game developer Playtika for $4.4 billion in 2016. Playtika makes more revenue from social casino games than Zynga. However, an aggressive marketing plan for all of Zynga’s social casino games can eventually help it emulate Playtika’s estimated 2016-era quarterly revenue of $237 million.

The long-running Zynga Poker and Hit it Rich! Slots web/mobile games contribute 30% of Zynga’s revenue. Zynga has other social gambling games like Wizard of Oz Slots, Willy Wonka Slots, Black Diamond Casino and Gin Rummy Plus. My guesstimate is that social casino games contribute 50 to 55% of Zynga’s quarterly revenue of $168 million.

My buyout valuation of $4.4 billion for Zynga is also due to its upcoming games based on Star Wars, Harry Potter, and Game of Thrones. Social casino games or any video games based on these three very popular movie/TV franchises have the potential of adding $50 million or more to Zynga’s quarterly revenue. The Star Wars: Galaxy of Heroes mobile game contributed $54.8 million to Electronic Arts (EA) last Q2 2018. Zynga’s upcoming Star Wars mobile game can also become as huge as Star Wars: Galaxy of Heroes.

Another factor in my high valuation for Zynga is NaturalMotion’s CSR Racing 2 mobile game. CSR Racing 2’s quarterly revenue is $23 million, making it one of the top-grossing racing mobile games. This game’s quarterly revenue can go higher after the recent release of the Legends update.

Zynga Has A Growing Advertising Business

My buy recommendation for ZNGA is also thanks to its growing in-game advertising services. Zynga earned $65 million (28% of quarterly revenue) from making its games a social advertising platform. Zynga’s monthly active user count is only 82 million and yet its advertising business is generating $65 million in quarterly revenue. Zynga Ads must be a very effective platform for other developers seeking new app installs.

Zynga Ads’s long-term potential is obvious. Social media advertising is growing at a 48.2% CAGR. All the games of Zynga are social in nature. They definitely contributed to the $13.1 billion revenue generated from social media advertising during H1 2018.

Conclusion

Going long on ZNGA is highly recommended. The long-term survival and prosperity of Zynga is assured by its growing advertising business and leadership position in the social casino gaming industry. Zynga possibly making new hit games can increase the total audience for its advertising platform.

The high probability of Zynga being bought by a bigger video games company is also another inspiring thought. Tencent paying $4.50 for each ZNGA share is feasible. Tencent can afford my $4.4 billion buyout price guesstimate for Zynga. Tencent has over $23 billion in cash & short-term investments.

Paying $4.50 per share lower than the average 12-month price target of $4.74 TipRanks-tracked analysts for ZNGA.

(Source: TipRanks)

My buy rating for ZNGA is backed by its bullish one-year forecast from I Know First.

How to interpret this diagram.

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