Zynga Stock Down 20% in August – Time to Buy ZNGA Stock?

The price of Zynga stock has dived nearly 20% so far in August after the company announced that it will be acquiring the Chinese mobile video game developer StarLark for a total of $525 million in a cash-and-stock-deal.

Moreover, the company reported bookings slightly lower than forecasted during the second quarter of 2021 while it reduced its full-year net bookings guidance from $2.9 billion to $2.8 billion as the pandemic tailwind could be starting to fade.

Could this pronounced downtick present an opportunity to buy some shares of the video game developer at a bargain or is the market possibly pricing a deterioration in the firm’s fundamentals after a series of large acquisitions?

The following article takes a closer look at Zynga’s latest price action and fundamentals to possibly answer that and other relevant questions about the firm’s outlook.

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Zynga Stock – Technical Analysis

The price of Zynga shares was already trading 22% below its 52-week high of $12.3 per share seen back in February amid an ongoing sector rotation that took place earlier this year resulting from a possibly fading pandemic tailwind for tech stocks.

Meanwhile, the sharp drop that took place following the release of this latest quarterly report has pushed the stock to negative territory on a year-to-date basis, with Zynga now being 19% down for the year while trading 34% below its 52-week high.

As a result of this pronounced downtick, momentum readings have been pushed to extremely negative levels, with the Relative Strength Index (RSI) currently posting its worst reading in the past 7 years at least while the situation is even worst for the MACD as it has plunged to its worst levels in around 9 years.

These readings emphasize the relevance of this recent downtick as it could be a sign of the times for Zynga, with the acquisition of StarLark now possibly weighing on the firm’s valuation and future price action.

Trading volumes on the day of these announcements were more than three times higher than the 10-day average while all short-term and long-term simple moving averages have been broken as a result of the drop.

Moving forward, the outlook for ZNGA stock is bearish based on these overly pessimistic readings while a fundamental analysis of the business would probably determine the extent of the current downside risk depending on where the company’s fair value may be standing at the moment.

From a purely technical standpoint, the next support level to watch would be found at $7.7 per share, which would result in a short-term 5% downside risk.

Zynga Stock – Fundamental Analysis

Zynga’s revenues have been growing at a fast pace in the past five years, moving from $741 million back in 2016 to $1.97 billion by the end of 2020, with the past two years being the most relevant as revenues jumped more than 40% during each of these periods.

During those two years, the company acquired multiple businesses and those have been partially responsible for accelerating the firm’s revenue growth to its current levels. These acquisitions include the purchase of Small Giant, Peak, and Rollic – all of which were video game developers.

In total, the firm spent approximately $1.8 billion in acquiring these businesses and all the transactions were paid through a combination of cash and equity. Adding the latest two acquisitions the firm announced (StarLark for $525 million and Chartboost for $250 million), total acquisitions would go up to $2.58 billion.

For the completion of these deals, the company has expanded its long-term debt to $1.32 billion by the end of the second quarter of 2021 and even though cash and equivalents ended that same period at around $1.5 billion those reserves will probably be reduced upon completing these two latest deals.

Meanwhile, the firm’s total assets currently stand at $6.13 billion including $3.92 billion in goodwill and intangibles.

The firm’s profitability has suffered as a result of these latest acquisitions, with Zynga swinging to net losses last year after posting $430 million in negative net income compared to the $42 million positive net earnings it reported the year before.

For 2021, the company expects to report revenues of $2.6 billion resulting in a 32% jump compared to a year ago while net losses are expected to land at $150 million. Meanwhile, the firm’s adjusted EBITDA, which excludes non-recurring and non-cash items, is expected to jump to $450 million resulting in a 70% jump compared to last year’s figure.

Even though these adjusted numbers point to a positive outlook for the firm, it is unclear if the firm will be able to successfully generate positive results out of these acquisitions and market participants appear to remain skeptical about the firm’s outlook as reflected by the sharp drop that followed Friday’s announcement.

Based on today’s price of $8 per share, Zynga is trading at 23 times its forecasted adjusted earnings per share for 2021 and at 18 times the figure forecasted for 2022. Even though this multiple is fairly low for a company displaying the kind of growth that Zynga has experienced, it remains to be seen if these acquisitions will ultimately result in higher profitability for the company in the future.

Moreover, the firm’s decision to load up on debt to settle these transactions raises the stakes for Zynga as the positive future performance of the companies it has acquired has to be good enough to justify the price the firm has paid for them.

For those who believe that the company will emerge stronger, larger, and more profitable upon completing these acquisitions, the current multiple seems fairly attractive as long as these profit targets are hit.

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