Ticker: NASDAQ: “ZNGA” Recommendation: HOLD Price: $2.70 Price Target: $3.10 Recommendation: Voltron Capital Investments (VCI) issues a hold recommendation for Zynga (ZNGA) with a target price of $3.10. Using a weighted blend of forward Price/Sales (60%) and EV/Sales (40%) multiples the VCI estimate recognizes a 14.8% potential upside from the current share price of $2.70. Using these metrics VCI currently considers ZNGA to be undervalued. There are several outstanding issues to consider, such as an over allocation of funds towards (intangible) asset growth, uncertainty concerning new games coming through the pipeline in 2015, and a lack of operational efficiency. Zynga’s lack of prior performance since their IPO has cast doubts about the firm’s ability to deliver profitable returns. Therefore, VCI currently advises a hold strategy for Zynga with a possible buy rating in the future based upon proven profitability through increased revenue, operational efficiency, and positive cash flows. Highlights: Zynga Hybrid Strategy “Mid-Core” & Foray into “Real-Money” Gaming Models Mid-Core games seek to combine the high engagement of core strategy games with the quick adoption characteristics of casual games. This will provide an in depth gaming experience to a more broad and diverse user base. Hopefully this approach will appeal to more users across multiple platforms to increase player retention while engaging more casual users to pay for in-game upgrades and items. Zynga’s first step to entering the lucrative (49% of the market) RPG gaming segment was BattleZone in 2013. Zynga’s new release from the acquisition of NaturalMotion, Dawn of the Titans, is the next step in the gaming evolution for the company. Zynga is pursuing the “Real-Money” gambling platform of social gaming with titles such as ZyngaPlusPoker & ZyngaPlusCasino overseas in counties such as the U.K. The international gaming market is valued $32b which Zynga can exploit to its benefit. Zynga faces stiff competition from established names in the Casino Industry, such as Caesars Entertainment, who currently operates in Europe through the acquisition of social and mobile game maker Playtika. The Legal aspects of gambling within the U.S. are being resolved on a state-by-state basis, due to this, Zynga is not currently pursuing a U.S. gaming license. Zynga Shifting Away from Legacy Social Platforms Zynga’s ever more increasingly complicated and deteriorating relationship with social networking platform giant Facebook is driving the two companies in different directions. In Q1, 2013 Zynga no longer required a Facebook log-in to access its games. Zynga subsequently launched a 3rd party platform for social game development. This should help insure that Zynga is producing desirable quality titles that will be readily adopted by the public. Dependence on Established Titles High dependence on past top performing titles such as the FarmVille series and Texas HoldEm Poker may be a risk to Zynga’s future cash flows as the current users lose interest in favor of new and more intricate apps. Social Networking Market Expansion Facebook boasts over a billion active users worldwide, but there is still room to grow as 85% of the world’s population has yet to adopt a stance on social platforms. Zynga can leverage its large base of current users and past user information to market its existing titles and cheaply inform its clientele of new games coming down the pipeline. *(reference source: www.Trefis.com) Valuation Measures Market Cap (intraday)5: 2.46B Enterprise Value (Mar 21, 2015)3: 1.54B PEG Ratio (5 yr expected)1: -2.25 Price/Sales (ttm): 3.5 Price/Book (mrq): 1.27 Enterprise Value/Revenue (ttm)3: 2.24 Enterprise Value/EBITDA (ttm)6: -14.74 Share Statistics Avg Vol (3 month)3: 15,494,300 Avg Vol (10 day)3: 16,438,800 Shares Outstanding5: 911.65M Float: 691.80M % Held by Insiders1: 11.51% % Held by Institutions1: 63.50% Shares Short (as of Feb 27, 2015)3: 71.04M Short Ratio (as of Feb 27, 2015)3: 4 Short % of Float (as of Feb 27, 2015)3: 9.80% Shares Short (prior month)3: 68.87M Trading Information Stock Price History Beta: 1.8 52-Week Change3: -42.55% S&P500 52- Week Change3: 13.49% 52-Week High (Mar 25, 2014)3: 5.08 52-Week Low (Feb 13, 2015)3: 2.2 03/24/2015 Industry: Software Sector: Technology Sub-Sector: Social Network Game Development
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2015_03_24 Final Research Report - Zynga (FINAL COPY) PDF
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Ticker: NASDAQ: “ZNGA” Recommendation: HOLD
Price: $2.70 Price Target: $3.10
Recommendation:
Voltron Capital Investments (VCI) issues a hold recommendation for Zynga (ZNGA) with a target
price of $3.10. Using a weighted blend of forward Price/Sales (60%) and EV/Sales (40%) multiples
the VCI estimate recognizes a 14.8% potential upside from the current share price of $2.70. Using
these metrics VCI currently considers ZNGA to be undervalued. There are several outstanding issues
to consider, such as an over allocation of funds towards (intangible) asset growth, uncertainty
concerning new games coming through the pipeline in 2015, and a lack of operational efficiency.
Zynga’s lack of prior performance since their IPO has cast doubts about the firm’s ability to deliver
profitable returns. Therefore, VCI currently advises a hold strategy for Zynga with a possible buy
rating in the future based upon proven profitability through increased revenue, operational efficiency,
and positive cash flows.
Highlights:
Zynga Hybrid Strategy “Mid-Core” & Foray into “Real-Money” Gaming Models
Mid-Core games seek to combine the high engagement of core strategy games with the quick
adoption characteristics of casual games. This will provide an in depth gaming experience to a more
broad and diverse user base. Hopefully this approach will appeal to more users across multiple
platforms to increase player retention while engaging more casual users to pay for in-game upgrades
and items. Zynga’s first step to entering the lucrative (49% of the market) RPG gaming segment was
BattleZone in 2013. Zynga’s new release from the acquisition of NaturalMotion, Dawn of the Titans,
is the next step in the gaming evolution for the company.
Zynga is pursuing the “Real-Money” gambling platform of social gaming with titles such as
ZyngaPlusPoker & ZyngaPlusCasino overseas in counties such as the U.K. The international gaming
market is valued $32b which Zynga can exploit to its benefit. Zynga faces stiff competition from
established names in the Casino Industry, such as Caesars Entertainment, who currently operates in
Europe through the acquisition of social and mobile game maker Playtika. The Legal aspects of
gambling within the U.S. are being resolved on a state-by-state basis, due to this, Zynga is not
currently pursuing a U.S. gaming license.
Zynga Shifting Away from Legacy Social Platforms
Zynga’s ever more increasingly complicated and deteriorating relationship with social networking
platform giant Facebook is driving the two companies in different directions. In Q1, 2013 Zynga no
longer required a Facebook log-in to access its games. Zynga subsequently launched a 3rd party
platform for social game development. This should help insure that Zynga is producing desirable
quality titles that will be readily adopted by the public.
Dependence on Established Titles
High dependence on past top performing titles such as the FarmVille series and Texas HoldEm Poker
may be a risk to Zynga’s future cash flows as the current users lose interest in favor of new and more
intricate apps.
Social Networking Market Expansion
Facebook boasts over a billion active users worldwide, but there is still room to grow as 85% of the
world’s population has yet to adopt a stance on social platforms. Zynga can leverage its large base of
current users and past user information to market its existing titles and cheaply inform its clientele of
new games coming down the pipeline.
*(reference source: www.Trefis.com)
Valuation Measures
Market Cap (intraday)5:
2.46B
Enterprise Value (Mar 21, 2015)3:
1.54B
PEG Ratio (5 yr expected)1:
-2.25
Price/Sales (ttm): 3.5
Price/Book (mrq):
1.27
Enterprise Value/Revenue (ttm)3:
2.24
Enterprise Value/EBITDA (ttm)6:
-14.74
Share Statistics
Avg Vol (3 month)3:
15,494,300
Avg Vol (10 day)3:
16,438,800
Shares Outstanding5:
911.65M
Float: 691.80M
% Held by Insiders1:
11.51%
% Held by Institutions1:
63.50%
Shares Short (as of Feb 27, 2015)3:
71.04M
Short Ratio (as of Feb 27, 2015)3:
4
Short % of Float (as of Feb 27, 2015)3:
9.80%
Shares Short (prior month)3:
68.87M
Trading Information
Stock Price History
Beta: 1.8
52-Week Change3:
-42.55%
S&P500 52-Week Change3:
13.49%
52-Week High (Mar 25, 2014)3:
5.08
52-Week Low (Feb 13, 2015)3:
2.2
03/24/2015
Industry: Software Sector: Technology
Sub-Sector: Social Network Game Development
Voltron Capital Investments (VCI) March 24, 2015
2
U.S. Consumer
Sentiment
U.S. Consumer
Price Index
Zynga Stock Price Zynga Timeline:
February 2014 – (Rise in price) - Zynga CEO Don Mattrick stated that the mobile video game
company is about halfway through his turnaround efforts at a Game Developers Conference.
Zynga acquired the U.K.-based game maker NaturalMotion for $527 million. NaturalMotion
employs a game strategy more focused on creating a quality experience than maximizing
monetization, something that represents a change in strategy for Zynga.
March 2014 – (Decline in price) - Zynga share price declines massively due to King IPO. Zynga
trades lower after Facebook announces Oculus VR acquisition. Board approves a $250k salary
increase for Founder/Chairman Mark Pincus as well as stock options bonuses for other officers.
May 2014 – (Decline in price) - Soros cashed out more than 80% of his stake in both Microsoft
Corporation and Zynga after investing in both companies for less than one year. King games
surges in buy recommendations and value with increases in revenue. Investors switch over
from Zynga to king en mass
October 2014 – (Decline in price) - Board approved salary and bonus increases in compensation for
certain officers as well as additional stock, amounting to $75,000 in cash and 700,000 Class A
common shares. News of a sell rating by several prominent financial sites reaches investors
with concerns about Zynga’s lack of and decreasing performance.
Business Description:
Zynga Inc. develops, markets, and operates online social games as live services played on the Internet, social networking sites, and mobile
platforms in the United States, Asia, and Europe. The company offers its online social games under the FarmVille, Words With Friends,
Zynga Poker, Hit It Rich! Slots, CSR Racing, FarmVille 2: Country Escape, NFL Showdown, New Zynga Poker, New Words With
Friends, Wizard of Oz Slots, Looney Tunes Dash!, CSR Classics, and Clumsy Ninja names. Its games are accessible on Facebook and
other social networks, mobile platforms, and Zynga.com. The company was formerly known as Zynga Game Network Inc. and changed its
name to Zynga Inc. in November 2010. Zynga Inc. was founded in 2007 and is headquartered in San Francisco, California.
CEO Donald Mattrick said that Zynga’s new focus included the following: “Before I detail out our results, I would like to share the three
areas of focus that myself and our team have been applying energy against. The first area is how we grow and sustain hits that consumers
have validated over multiple years. The second area is how we enhance our capabilities to create new hits. The third is how we do both of
the above in a more efficient manner. These are the areas of focus that we have been applying to take our business into the future.”
*(reference source: 10K: Interview from www.VentureBeat.com)
Macro Analysis: Other Headings Relevant to Company
Consumer Confidence/Sentiment
Since January 2015, U.S. consumer confidence had experienced a decrease of 4.4% from 95.4 in January to
91.2 in February. This decline in consumer sentiment was due to renewed concerns over employment and
wage growth as well as a pessimistic outlook for the domestic economy.
Recent declines in oil prices and general increases in wage growth have significantly helped lower income
households by contributing to a marginal increase in overall consumer savings. Although consumers widely
anticipate that oil prices will eventually stabilize during the year overall consumer sentiment will most likely
plateau within the next few months. These trends should allow for excess disposable income to be spent on
leisure activities such as mobile gaming.
Consumer Price Index
The Consumer Price Index records the changes in price paid for a basket of goods and services. From January
2015 to February 2015 the CPI changed from 236.28 to 234.67. The decrease in values indicates that a
basket of good costs less from the previous month. This decrease in price is a .68% change from January to
February. This increase in excess consumer liquidity will add to disposable income that can be used for
leisure activities.
Initial Jobless Claims
Initial jobless claims have a significant impact on financial markets because unlike continued claims data,
which measures the number of persons claiming unemployment benefits, Initial jobless claims measures new
and emerging unemployment. This page provides - United States Initial Jobless Claims - actual values,
Voltron Capital Investments (VCI) March 24, 2015
3
Initial Jobless
Claims
Gross Domestic
Product
Unemployment
Rate
Major Industry
Players (www.IbisWorld.com)
Key Industry
Statistics (www.IbisWorld.com)
historical data, forecast, chart, statistics, economic calendar and news. Content for - United States Initial
Jobless Claims - was last refreshed on Saturday, March 7, 2015.
The advance seasonally adjusted insured unemployment rate was 1.8 percent for the week ending February
21, 2015, unchanged from the previous week's unrevised rate. The advance number for seasonally adjusted
insured unemployment during the week ending February 21, 2015 was 2,421,000, an increase of 17,000 from
the previous week's revised level. The previous week's level was revised up 3,000 from 2,401,000 to
2,404,000. The 4-week moving average was 2,403,500, an increase of 3,750 from the previous week's revised
average. The previous week's average was revised up by 750 from 2,399,000 to 2,399,750. As jobless claims
continue to fluctuate, there’s an ample base of unencumbered free time for people to use towards other
pursuits such as mobile gaming provided by Zynga. Therefore, although Zynga may not be directly growing
its revenue base, it may continue to grow in popularity and realize revenues in the future.
Gross Domestic Product
From 2013 to 2014 the U.S. GDP increased from 16,244.6 to 16,800 Billion, or an increase of 3.42%. This
indicates that the United States Economy is in a healthier state than last year. Also, it is important to note that
the 2014 figure is an all-time high for the U.S. Economy as reported by the World Bank.
GDP grew at a seasonally adjusted rate of 2.2% for Q4 of 2014. This shows slow but steady growth ending
2014 and relays a positive sentiment for 2015. This implies that as the economy slowly recovers, the
corresponding rise in wages will create more disposable income to be spent on non-essential items and
activities.
Unemployment Rate
In the United States, the unemployment rate measures the number of people actively looking for a job as a
percentage of the labor force. The Unemployment Rate in the United States decreased by 3.5% from 5.70
percent in January of 2015 to 5.50 percent in February of 2015. It is the lowest figure since May of 2008 as
the number of unemployed persons decreased steadily. There were 8.7 million unemployed people in February, down from 8.97 million in the previous month. Over
the year, the unemployment rate and the number of unemployed persons went down by 1.2 percentage points
and 1.7 million, respectively. As more people re-enter the job market, a greater influx of household income
will generate excess liquidity that can be used for leisure activities.
Industry Analysis and Competitive Positioning:
The industry that Zynga Inc. operates in is Social Network Game Development as defined by Ibisworld.com.
As a whole the industry generated $7.9 Billion in Revenues for fiscal year 2014 with a profit of $1.3 Billion.
The industry has been able to grow at a CAGR of 58.4% for FY’s 2009-2014 and is projected to have a
forward CAGR of 11.7% for FY2014-2019. The growth of this industry can be attributed to the adoption &
proliferation of the internet, social networks, networking websites, and smartphone connectivity &
proliferation. Another reason for this growth is new markets. The older demographics that do not play
traditional video game consoles are adopting games on their smartphones and tablets. The Social Network
Game Development industry is comprised of 2,764 businesses and it pays out $3.3 Billion in wages.
The top three companies in the industry with market share are Electronic Arts Inc. with 6.6%, Zynga Inc.
5.4%, and The Walt Disney Company with 5.2%. Electronic Arts’ brand name games include Playfish,
PopCap Games, Pet Society, Restaurant City, EA Sports, FIFA Superstars, SCRABBLE, Madden NFL
Superstars, World Series Superstars, The Sims Social, and Bejeweled. Zynga’s brand name games include
Competitive Rivalry – Shifting focus to mobile platforms (60%) will increase competition within the
industry.
The brisk evolution of gaming technology minimizes the window on which Zynga may capitalize their
efforts when putting forth new products/games.
The highly competitive nature of the Multi-media and graphic software forces companies to capture the
maximum amount of time and money spent by their users. Competition focuses on content, experience,
popularity, branding, and ease of use.
Zynga contends with a multitude of other forms of entertainment that compete for user’s time and attention.
Bargaining Power Of Buyers - A growing online gaming community coupled with options such as gaming consoles, desktops, mobile
platforms, and other forms of entertainment increases buyer power.
Buyers have a plethora of gaming options to choose from including platforms such as Xbox, PlayStation, computer games, apps and
mobile games.
Comparing 2012 to 2014, Zynga’s Monthly Average Users (MAU) decreased from 301.75 million to 118.25 million, a loss of 183.5
million users or a change of -60.81%. This demonstrates user’s desire for other products.
According the WSJ, only 1.9% of players actually pay to play Zynga’s games. Threat Of New Entrants - Zynga must be cautious due to low barriers to entry and the proliferation of competition. Low barriers to entry for virtual gaming guarantees a large number of competitors in the market.
Due to low costs of development and new trends/fads, increasing numbers of game developers are appearing in the market.
In contrast, the high cost of information dissemination, reaching new gamers, and the ability to distribute on platforms such as Apple’s
Appstore and Google Play does create some difficulty in entering the market.
Nintendo recently partnered with DeNA to create new games for smartphones in 2015. This demonstrates a high threat of new
entrants.
Bargaining Power Of Suppliers - Due to strategic partnerships with companies such as Apple and Google coupled with the
Facebook platform dissemination strategy.
Zynga divides its content over several platforms such as Facebook, Android, and Apple. The company relies on most if these platforms
for their revenues.
In 2014, Facebook made 24.9% of its revenues from online gaming of which Zynga is only a small portion.
Facebook is the primary platform for Zynga’s larger revenue producing games including FarmVille, Words With Friends, Zynga Poker,
Hit It Rich! Slots, and CSR Racing. These Social Network games for public use disseminated through social platforms places Zynga at a
disadvantage pertaining to service terms, fees, and conditions.
Zynga’s decision to separate from Facebooks new platform base for 10 of its existing titles may put the company at increased financial
risk from decreased revenues. However, Zynga may plan to discontinue these current titles in favor of new titles to be released this year.
Apple responded to Facebook’s platform change by migrating its policy to a 64-bit data standard in which Zynga must comply or be
left out.
Threat Of Substitute Products - The proliferation of alternative entertainment in the form of apps, consoles, etc. could decrease
users free time spent on Zynga games.
The value of the worldwide mobile gaming market is projected to increase from $3.5 billion in 2011 to $11.4 billion in 2017, an
increase of $7.9 billion or an increase of 225.71% according to Statista.com.
The increasing demand of alternative entertainment applications, social networks, and online sites will influence the flexible spending
and time allocated towards gaming platforms.
Online content developers such as Netflix, new TV applications from Yahoo, Facebook, and YouTube, and traditional physical
activities.
Voltron Capital Investments (VCI) March 24, 2015
15
Disclosures: Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company.
The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content
or publication of this report. [The conflict of interest is…]
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does [not] act as a market maker in the subject company’s securities.
Ratings guide:
Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater
over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.
A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over
the next twelve months.
Investment Research Challenge and Global Investment Research Challenge Acknowledgement:
[Society Name] Investment Research Challenge as part of the CFA Institute Global Investment Research Challenge is based on the Investment Research
Challenge originally developed by the New York Society of Security Analysts.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but
the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be
used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a
solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society
Name], CFA Institute or the Global Investment Research Challenge with regard to this company’s stock.