ZNGA: Bottom Fish-Ville

Written by GSCR Staff   
Tuesday, 12 June 2012 09:40

This top-tier game developer looks like a strong bottom fishing candidate today. We try to avoid bottom-fishing or even attempt bottom-fishing as it can be hazardous to your portfolio.  Traders like to refer to it as stepping in front of a falling knife.  Nonetheless, this situation seems pretty compelling, especially since sentiment is so overwhelmingly negative.

Zynga Corp. (NASDAQ – ZNGA - $4.97) hit a new 52-week low this morning, at $4.92, down over 10% for the day on heavy volume. Frankly, its association with Facebook (NASDAQ – FB) is killing the stock.  In fact, it is down from $12.00, which was the price of its early April 2012 secondary offering when selling shareholders sold stock.

Cowen put out a note saying that game usage is slowing.  Possible? Sure. Could prove to be a good call. We tend to think otherwise and believe that Zynga is doing fine.  Revenue grew 32% to $321M in Q1, and the number of daily active users, monthly active users, mobile users, etc. increased sharply from the year earlier. It is hard to imagine but there are nearly 300 million monthly active users of its games, and 62 million daily active users.  Non-GAAP income jumped year-over-year and was $0.06 per share.

Guidance is for $0.23-0.29 in non-GAAP EPS this year, which puts the P/E at around 20x, which is very reasonable.  Moreover, Street estimates call for $0.37 in 2013, which is a 13x multiple. Even if numbers are reduced by 15%, the stock is still attractive. The Company has roughly a billion in cash and marketable securities, and the stock is trading a little more than 2x this year’s revenue.  While it is possible the stock continues to break down below $5.00, we think that the risk/reward is in investor’s favor.

Get out your fishing rod and consider reeling some in, after it settles down.

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