Zynga Stock Up 52% Today – Time to Buy ZNGA Stock?

The price of Zynga stock is going up 52% this morning in pre-market stock trading action following news that the company will be acquired by Take-Two Interactive in a cash-and-stock deal that values the firm’s equity at $12.7 billion.

In a press release published today, Zynga stated that Take-Two will pay $9.86 per share of the company resulting in a 64.3% premium above last Friday’s market price.

Around 35.5% of the cost will be paid in cash while the remaining percentage will be paid in Take-Two stock.

The acquisition of Zynga would allow Take-Two Interactive to strengthen its portfolio of mobile games by incorporating the most successful titles launched by the San Francisco-based developer.

Even though the terms of the deal seem attractive at first glance, at $9.86 Zynga stock is still being valued 19.8% below its 52-week high of $12.3 per share from February last year.

The Board of Directors of the two companies have already approved the deal and the transaction is expected to be settled by the end of June 2022. That said, there is a provision that gives Zynga the possibility of negotiating an alternative proposal with a third party within a 45-day period after the definitive agreement is executed.

What can be expected from Zynga stock after today’s important development? In this article, I’ll be assessing the price action and fundamentals of this mobile gaming stock to outline plausible scenarios for the future.

68% of all retail investor accounts lose money when trading CFDs with this provider.

Zynga Stock – Technical Analysis

Today’s acquisition of Zynga is not at all unexpected as the stock has been trading at attractive multiples in the past few months as the market became pessimistic about the company’s prospects amid a fading pandemic tailwind.

Prior to today’s news, the stock was trading nearly 50% below its 52-week high of $12.32 per share. Meanwhile, at last Friday’s closing price of $6 per share, Zynga was trading at just 15 times its forecasted adjusted earnings per share for 2022.

This made the company an attractive target for companies within the sector and especially more so considering the growth prospects of the gaming industry.

The technical view at this point is not too relevant unless the deal doesn’t go through. Somehow interestingly, if today’s uptick materializes as is during the live session, the price action would still not manage to close what remains of the price gap that bears left behind in August last year.

Zynga Stock – Fundamental Analysis

Even though the acquisition of Zynga is positive in the short term for those who have held on to their shares for a long time, it also modifies their investment thesis moving forward as the company will now become part of a larger corporation – in this case, Take-Two.

Investors will receive an equity consideration from the acquirer and will now become shareholders of Take-Two Interactive. Therefore, Zynga stockholders must evaluate the merits of Take-Two stock as a potential investment.

Shares of Take-Two are declining 11% in pre-market action amid the deal’s dilutive equity consideration.

The company’s performance before this acquisition hasn’t been too good as revenue growth has been slowing down in the past three years.

Meanwhile, Take-Two generates around $500 to $800 million in free cash flows every year – a small sum relative to the size of this deal. In contrast, Zynga produces around $200 and $400 million in annual free cash flows meaning that the company is being valued at around 32 times its FCF-generation capacity.

Considering the large premium that Take-Two is paying for Zynga, the impact of the deal on the firm’s equity returns might be considerable. Last year, the company’s return on equity stood at 17.6% based on its GAAP net income.

Meanwhile, at this valuation of $12.7 billion, Zynga’s return on equity based on its GAAP earnings is null as the company has generated net losses of $89.9 million in the past 12 months.

By the end of September 2021, Take-Two’s weighted average shares outstanding stood at 116.8 million on a fully diluted basis. Based on the collar mechanism proposed for the Zynga deal, a total of up to 58.5 million shares will be issued to pay for the acquisition.

With this in mind, the takeover deteriorates Take-Two’s profitability relative to the capital that shareholders have invested in the business and the market could react negatively to this situation moving forward, meaning that, for Zynga shareholders, holding on to the Take-Two shares they will be receiving as a result of the deal might not be a good idea.

Buy ZNGA Stock at eToro with 0% Commission Now!