Zynga Stock Up 6% Today – Time to Buy ZNGA Stock?

The price of Zinga stock is up 6% this morning in pre-market stock trading action following the release of the firm’s earnings report covering the third quarter of 2021 as the company reported narrower than expected losses while beating revenue estimates for the period.

During the three months ended on 30 September, the company reported total revenues of $705 million resulting in a 40% increase compared to the same period a year ago while they exceeded analysts’ forecasts for the period by 7%.

Ad revenues doubled compared to the third quarter of 2020 while gaming revenues increased by 31% on a year-on-year basis at $571 million despite the tough comps the company was facing amid the positive impact of the pandemic on the demand for online games.

Meanwhile, Zynga reported a 120% year-on-year jump in its mobile monthly active user (MAU) figure – currently standing at 183 million – but average bookings per user declined 12% at $0.188. the company cited the addition of Rollic’s hyper-casual portfolio as the primary reason for this MAU uptick.

During this quarter, Zynga managed to trim its operating expenditures including a 600 basis points drop in sales and marketing expenses as a percentage of revenue and a 1300 basis points decrease in R&D expenditures. Direct cost of revenue as a percentage of sales also declined from 47% to 37% on a year-on-year basis.

As a result, Zynga trimmed its net losses from $122 million back in Q3 2020 to $42 million this quarter. This translated into a 4 cent GAAP loss per share that was better than analysts’ estimate of $0.09 per share for the period.

For the fourth quarter of the year, the firm expects to report revenues of $675 million and net income of minus $60 million while for the full 2021 fiscal year revenues are expected to land at $2.8 billion while net losses should end the period at $97 million.

Can these positive results reverse the downtrend that Zynga stock has been experiencing since the year started? In this article, I will be assessing the price action and fundamentals of the company to outline plausible scenarios for the future.

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Zynga Stock – Technical Analysis

Back in August when I last wrote about Zynga, I emphasized that there was a significant downside risk ahead as the company embarked on an acquisition spree that included nearly $2.6 billion deployed for acquiring businesses such as Rollic and StarLark.

Since that article was published, the stock has shed nearly 14% of its value while it closed yesterday 43% below its 52-week high of $12.3 per share.

However, this latest negative momentum seems to be fading as indicated by the bullish divergences that have appeared in both the Relative Strength Index (RSI) and the MACD as the two oscillators have made higher lows despite the price collapsing to a lower stance.

The combination of these divergences and today’s positive results may result in a reversal of the latest downtrend the stock has been experiencing. However, such a move won’t be confirmed unless the price climbs above its short-term moving averages.

Moving forward, a move above the $8 level may confirm this bullish outlook. If that happens, a first target for the stock could be set at around $9 to $10 per share if market participants decide to go for the bearish price gap that remains open since the company reported its Q2 2021 results.

Zynga Stock – Fundamental Analysis

Zynga has managed to push its sales higher in the past 6 years on the back of higher online gaming demand and through the acquisition of top companies within the space.

However, as I highlighted in the previous article, this has been a risky strategy for the company as it has forced Zynga to ramp up its long-term debt from zero to more than $1 billion in the past couple of years.

Meanwhile, shareholders have, to some extent, suffered from this strategy as the company has expanded its share count by nearly 22% to finance these purchases.

Even though revenues per share have been lifted, the same cannot be said for the company’s earnings per share as Zynga keeps losing money. That said, the firm seems resolved to trim some of those losses and to reverse that trend as indicated by its forecasted results for the 2021 fiscal year.

In this regard, Zynga’s losses may find a bottom this year and the company may start to deliver positive results in 2022 and that view is shared by analysts as indicated by their GAAP EPS forecasts of $0.12 and $0.2 for Zynga for 2022 and 2023 respectively.

Meanwhile, on an adjusted basis, net profits per share are expected to land at $0.45 next year resulting in a forward P/E ratio of 16 for the company.

Considering the positive trends that are currently lifting the performance of companies within the gaming sector and their potential to outlive the pandemic, Zynga is uniquely positioned to reap some of those benefits if online gaming demand keeps increasing on the back of an accelerated digital adoption.

With this in mind, and considering the positive technical outlook outlined above, the stage seems for Zynga stock to make a comeback in the following weeks on the back of this positive quarterly report.

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