This Low-Priced Tech Stock Could Deliver Big Returns
There are many low-priced tech stocks trading in the market, and not all of them are worth considering. But when I looked at Zynga Inc (NASDAQ:ZNGA) earlier this year, I thought it was something special.
“Judging by the recent share price performance, market participants seem to have already started warming up to ZNGA stock. Investors looking to get a piece of the action may want to act quickly.” That’s what I told readers of Profit Confidential in February of 2019.
In that article, I explained why Zynga Inc, which was trading at $4.74 per share at the time, could be an opportunity for tech investors on a budget.
I hope you took advantage of that piece. Since my article was published, ZNGA stock has surged more than 34%.
And the opportunity might not be over just yet. Based on what the company is doing, shareholders of Zynga Inc could be further rewarded.
Headquartered in San Francisco, California, Zynga Inc is in the mobile gaming business. The company was founded back in 2007, and has grown to have a portfolio of some of the most popular mobile games, including Zynga Poker, CSR Racing, and Words With Friends. Zynga’s games can be played across different social platforms and are available in more than 150 countries around the world. Since Zynga’s inception, more than one billion people have played the company’s games.
The main reason why I liked Zynga back in February was the company’s growth. Despite being in the business for more than a decade, which is considered a long time in the fast changing tech world, Zynga had found ways to expand its presence.
Capitalizing on Mobile Gaming
Just take a look at the company’s latest earnings report and you’ll see what I mean. In the second quarter of 2019, Zynga Inc generated $306.0 million in revenue, marking an impressive 41% increase year-over-year. (Source: “Q2 2019 Zynga Quarterly Earnings Letter,” Zynga Inc, July 31, 2019.)
What’s even more impressive is the company’s bookings. In the second quarter, Zynga’s bookings totaled $376.0 million, up 61% from the year-ago period.
In the mobile gaming business, bookings are basically revenue plus deferred revenue. In the case of Zynga, the company defines bookings as the total amount of revenue from the sale of virtual goods that would have been recognized in a period if they recognized all revenue immediately at the time of sale.
If that sounds a bit confusing, here’s an example: suppose a player purchases $100.00 of virtual currency in a Zynga mobile game and they will spend $10.00 in the game every month. In the first month, Zynga would recognize $10.00 in revenue and $100 in bookings. The deferred revenue at the end of the first month would be $90.00.
In other words, the sizable increase in Zynga’s bookings in the second quarter of 2019 will likely translate to solid revenue growth in the months ahead.
Notably, Zynga’s Empires & Puzzles and Merge Dragons! mobile games both achieved record high revenue and bookings during the quarter. They were also the main contributors to the company’s deferred revenue build of $70.0 million.
Meanwhile, Zynga’s Words With Friends, a multiplayer word game that was first released back in 2009, just had its best second-quarter mobile revenue and bookings in its franchise history.
Over the years, consumers have been shifting from desktop computers to mobile devices, and Zynga Inc is doing a great job at capitalizing on that trend. In the second quarter of 2019, mobile represented 94% of the company’s total revenue and 95% of its total bookings. This marked a solid improvement year-over-year because in the second quarter of 2018, mobile’s contribution to Zynga’s revenue and bookings were 89% and 90%, respectively.
One of the most encouraging signs about Zynga’s business is that the company managed to make more money from each user. Just take a look at the chart blow; it shows that in the second quarter of 2018, Zynga’s mobile average bookings per mobile daily active user (ABPU) was $0.11. Since then, the number has been trending up consistently to reach $0.188 in the second quarter of 2019. (Source: “Zynga Q2 2019 Financial Results,” Zynga Inc, last accessed August 1, 2019.)
In other words, in just a year’s time, Zynga managed to generate 70.9% more bookings from the average user.
Zynga Inc Mobile ABPU
Other than earning bookings from the players of its games, Zynga Inc also makes money from advertising.
In the reporting quarter, Zynga’s advertising revenue came in at $66.0 million, up 26% year-over-year and marking its highest second-quarter advertising revenue in history. Advertising bookings also totaled $66.0 million, representing a 25% increase from the year-ago period.
But it’s not all sunshine and rainbows at this mobile gaming company. Despite strong top line performance, Zynga Inc incurred a net loss of $0.06 per share in the second quarter. Still, the result was better than its previous guidance of a net loss of $0.07 per share.
What’s also worth noting is the company’s ability to generate cash. In an era where most headlines revolve around revenues and profits, cash flow often gets ignored. However, having the ability to generate a solid amount of cash flow is critical to a company’s financial health.
The good news is, Zynga Inc generated $99.0 million in operating cash flow in the most recent quarter. The amount not only represented a 140% increase year-over-year, but also marked the company’s best performance on the metric since the fourth quarter of 2011.
Furthermore, Zynga generated $94.0 million in free cash flow during the quarter. Free cash flow is basically operating cash flow minus cash spent on capital expenditures.
By generating a solid amount of cash from its operations, Zynga had cash, cash equivalents, and investments of $831.0 million at the end of June. For a company operating in the fast changing mobile gaming industry, having a solid cash position should allow it to invest in ways that could further boost its competitive advantage.
Is the Best Yet to Come?
And the best could be ahead. When the company reported its second-quarter results, management also raised their guidance. For full-year 2019, Zynga now expects to generate $1.24 billion of revenue, which is $40.0 million higher than its previous guidance. The projected top-line number would represent a 37% increase from the $907.2 million of revenue generated in 2018.
At the same time, management is also raising their bookings guidance by $50.0 million to $1.5 billion for full-year 2019. Considering that Zynga Inc’s bookings totaled $969.5 million last year, the company is essentially predicting a bookings increase of 55%.
Looking further ahead, management said that they “continue to expect low double-digit revenue and bookings growth with greater operating leverage” for 2020. (Source: “Q2 2019 Zynga Quarterly Earnings Letter,” Zynga Inc, op. cit.)
Zynga Inc (NASDAQ:ZNGA) Stock Chart
Chart courtesy of StockCharts.com
As I mentioned earlier, Zynga stock was already traveling on a nice upward trend. And the latest earnings report should give another reason for investors to like ZNGA stock.
At the end of the day, because the Internet industry is filled with big-name tech giants, Zynga Inc remains an undiscovered stock for many market participants. Once more investors realize the potential of this mobile gaming company, Zynga stock could pick up more upward momentum.