Upgrade & Financials Prompt Short Term Pop

Good morning!  Analysts at Merrill Lynch upgraded Zynga Inc. (NASDAQ – ZNGA - $2.56) to a BUY and the stock is already up over 6% on close to 1 million shares traded early today.  Merrill cited ZNGA’s $2.20 per share in cash as the main driver for the upgrade after great concern that its reliance on Facebook (NASDAQ – FB), limited exposure to faster-growing mobile games market and departure of key execs would keep the shares down. The Company is set to announce earnings today after the close.

Zynga offers its online social games under the CityVille, Zynga Poker, FarmVille, CastleVille, FrontierVille, Mafia Wars, Word with Friends, Hidden Chronicles, Zynga Bingo, Scramble With Friends, Slingo, and Dream Heights names. Its games are available on various platforms, including Facebook and other social networks, as well as mobile platforms, such as Apple iOS and Google Android worldwide.

Additionally, we like this stock for a couple of reasons.  First, the charts indicate a pop in the short term, particularly a very bullish indicator on the MACD analysis.  Second, the company continues to release new products and maintain a solid amount of cash.  ZNGA reported a free cash flow of $17 million in 3Q12, while implementing a cost reduction plan and releasing Farmville2 and Chefville.  The company release Coasterville in December of 2012 in 12 different languages.

We believe ZNGA will continue to be accumulated even if 4Q12 earnings come in negative, as they are expected to later on today.  We think the stock reaches the $4.00 level in short order on a steady climb back.

Have a great day.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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