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 (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.
