Canaccord Genuity analysts Michael Graham and Maria Ripps maintains their Hold rating for Zynga Inc (NASDAQ:ZNGA) as the company is set to announce inline results but with little potential for upside.

zynga

Zynga stock

Zynga Inc (NASDAQ:ZNGA) stock continues to generally grind higher as metrics from core games have somewhat stabilized over the past few quarters. The data we track suggests Q4 estimates are achievable but with little potential for upside. We believe management will likely need to soften the ambition to “grow” in 2014 that it alluded to on the Q3 call. In addition, while management may provide some broad strategic guidelines, we suspect any hardened strategy, complete with potentially right-sizing Zynga Inc (NASDAQ:ZNGA)’s large cost structure, is at least a quarter or two away. Thus, we believe that for now the “bounce off the bottom” is largely complete, and we reiterate our HOLD rating and $4.00 price target.

Key Points

Facebook Inc (NASDAQ:FB) DAU estimates for Zynga Inc (NASDAQ:ZNGA)’s three core games (Farmville, Farmville 2, Poker) declined 12% sequentially in Q4, slightly worse than 9% in Q3, suggesting it may be a close call for Zynga Inc (NASDAQ:ZNGA) to hit our online game revenue forecast of a 14% sequential decline in Q4 (the same rate of decline reported in Q3).

However, our tracking of total Facebook DAU and our proprietary mobile index paints a slightly more positive picture, and overall we expect an in-line Q4 with little possibility of upside.

We believe it will be extremely difficult for Zynga Inc (NASDAQ:ZNGA) to grow bookings in 2014; we model what may be a generous 16% decline relative to management’s last stated ambition to “grow” in 2014.

Zynga Inc (ZNGA) valuation

We maintain our HOLD recommendation and $4.00 price target. Our price target is based on 2.5x our 2014 revenue estimate of $787 million. We note that the company has ~$2.00 per share in cash, cash equivalents, and marketable securities.