Zynga Inc (NASDAQ:ZNGA) stock was once riding fast and high, and was considered the king of social gaming. However, ZNGA stock lost its crown as it struggled to overcome the obstacles on its way toward continued growth and profitability.
Some investors are wondering if the company will eventually pull itself up and return to its former glory. ZNGA stock is currently trading around $2.90 per share. Is it time to buy Zynga stock to benefit from its potential upside in the future, or is it better to just stay away from it because it is too risky?
Challenges and Turnaround Strategies for Zynga stock
In July 2012, ZNGA stock suddenly suffered a massive decline when it reported a net loss of $22.8 million in the second quarter. Additionally, Facebook Inc (NASDAQ:FB) decided to amend its partnership agreement with Zynga. (Source: “Form 8-K,” U.S. Securities and Exchange Commission, November 28, 2012.) The change hurt the social gaming company further: the user engagement and monetization of its games declined. Since then, the company failed to deliver quarterly profits and Zynga’s stock price fell to as low as $1.76 per share from its peak of $14.99 per share.
Zynga’s leadership implemented turnaround strategies, such as hiring a new CEO, reducing costs, and shifting its games to the mobile platform. The company hired Don Mattrick, the head of “Xbox One” at Microsoft Corporation (NASDAQ:MSFT), as CEO. (Source: “Zynga Names Don Mattrick Chief Executive Officer,” Zynga Inc, July 1, 2013.)
During his short tenure at Zynga, Mattrick spearheaded the acquisition of NaturalMotion Limited for $527.0 million to boost the company’s creative pipeline and accelerate its mobile growth. NaturalMotion is a gaming company based in the United Kingdom that is behind the CSR Racing and Clumsy Ninja franchises. Mattrick also started reducing the company’s global workforce by 15% and expanded its cost-savings plan. (Source: “Zynga to Acquire Leading Mobile Game Developer NaturalMotion,” NaturalMotion, January 30, 2014.)
Mattrick decided to leave the company in 2015, and he believed that it is already in a stronger position to pursue its growth opportunities. Zynga co-founder Mark Pincus took over again as CEO until the board appointed Frank Gibeau to assume the role in March 2016. Pincus serves as executive chair of the company.
Zynga Stock 2Q Results Showed Improvement
Last month, Zynga stock released its second-quarter financial results, which showed that the company made good progress in its turnaround efforts. The company reported revenue of $182.0 million, which is higher than its guidance of around $170.0 million to $180.0 million. Its generally accepted accounting principles (GAAP) net loss was $4.0 million, or -$0.01 per share, which is better than its expected net loss of $20.0 million to $26.0 million, or -$0.02 to -$0.03 per share.
Zynga stock’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $12.0 million was also above its guidance while its GAAP operating expenses of $132.0 million declined 15% quarter-over-quarter, due to a 14% reduction in marketing expense.
Its total bookings were $175.0 million, which is above the high end of its guidance. Its mobile bookings increased 19% to $137.0 million (78% of total overall bookings). Its advertising and other bookings increased 17% to $45.0 million year-over-year.
According to Zynga, Apple Inc. (NASDAQ: AAPL) and Google (Alphabet Inc (NASDAQ:GOOG)) are now its two largest platforms for online game bookings. Zynga had approximately 61 million monthly active users in the second quarter.
ZNGA stock ended the quarter with $868.0 million in cash, cash equivalents, and marketable securities. Its total assets were $1.94 billion, and its total liabilities were $276.0 million, which means the company has a strong balance sheet. (Source: “Form 10-Q,” Zynga Inc, August 5, 2016.)
NaturalMotion Acquisition A Smart Move for ZNGA Stock
Zynga’s decision to purchase NaturalMotion was a smart move, given the fact that CSR Racing is a successful mobile game franchise with more than 190 million downloads.
The social gaming company released the game CSR Racing 2 on June 30, and it was well received, with more than 600,000 five-star ratings across “App Store” and “Google Play.” Users have already raced 264 million miles in the mobile game, which was played in more than 200 countries and territories.
CSR Racing 2 is now the top free and top grossing mobile racing game. It is generating around $150,000 per day in the United States alone. It has 1.5 million daily active users in the country. (Source: “CSR Racing 2 usage and revenue results: Is NaturalMotion finally paying off for Zynga?,” SurveyMonkey, August 3, 2016.) Zynga is maintaining CSR Racing 2 with new supercars, tracks, and social features for fans.
NaturalMotion is working on an action strategy game, Dawn of the Titans, which is expected to be released during the holiday season this year. According to Zynga, the soft-launch feedback on the game was positive, due to its high-fidelity graphics and combat gameplay. According to Zynga, its priority for the game is to increase its long-term engagement and social features.
The Bottom Line for ZNGA stock
The turnaround strategy of Zynga seems to be working, its shift to the mobile platform particularly. Remember that its revenues from mobile bookings grew double-digits in the second quarter. There is a big possibility that the company will bounce back and become relevant again, based on the success of CSR Racing 2 and the positive feedback for the upcoming Dawn of the Titans.
Zynga stock would eventually become profitable if NaturalMotion continues to develop compelling games. The company’s CEO is focused on its turnaround by making sure that its studio is well-positioned to build high-quality and innovative games.
Despite Zynga’s struggles, its balance sheet remains strong, and it has an amazing collection of brands, compelling market opportunity, a growing market cap, and an engaged and passionate audience. Gibeau believes that the company has significant potential and growth opportunities, and it can create value for shareholders.
Wall Street analysts have a consensus recommendation for investors to hold their position in ZNGA stock. They forecasted that the stock could trade for as much as $5.00 per share over the next 12 months, which is an increase of 71.8%. Their median estimate is $3.00 per share, which is an increase of three percent.