Canaccord Genuity analysts Michael Graham and Maria Ripps look at some recent developments with Zynga, raising their price target on the back of positive surprises.
Zynga Inc (ZNGA) Gets Price Target Bump On Surprise Positives

Zynga Inc (NASDAQ:ZNGA) surprised in more ways than one, reporting earnings a week early due to the timing of the acquisition of Natural Motion. Bookings were at the high end of guidance (our mid-quarter checks were more in-line), and management guided to modest bookings growth in 2014 after including approximately $80M in Natural Motion bookings. Finally, management announced a 15% workforce reduction, which essentially makes room for the NM team. These are all positive moves; we would now like to see Zynga Inc (NASDAQ:ZNGA) settle into a cadence of releasing profitable games and right-sizing its cost structure over time.

Investment highlights

  • Bullish — Core games (FV, FVII, Poker) as a group grew sequentially for the first time all year; hit high end of guidance for Q4; reiterated somewhat bullish stance on 2014 bookings (albeit with $80 million in help from Natural Motion); monetization per MUP improved noticeably; ad revenue was strong
  • Bearish — Cost reduction plan of $30-$35 million is a positive step but only a beginning; game launch outlook still unclear; cash per share down to ~$1.50 from $2.00.
  • Estimate changes — We are raising our bookings estimates, reflecting guidance and Natural Motion; our bookings/non-GAAP EPS estimates for 2014 and 2015 go to $783M/$0.01 and $887M/$0.03, from $590M/$(0.09) and $622M/$(0.07).

Valuation

We raise our price target from $4.00 to $4.40; our new target is based on 2.8x our slightly higher 2015 bookings estimate of $887 million.