Zynga is showing signs of revenue stabilization, and its valuation is also in a decent range, which made George Kesarios, a contributor to Seeking Alpha, go bullish on the game maker. Until now, Kesarios was bearish on the social gaming company due to its premium valuation.
“Intact” balance sheet for Zynga
Kesarios noted that the last quarter was better than he expected in terms of quarter over quarter revenue growth. GAAP operating results are still negative, but the adjusted non-GAAP results have been breakeven for some time now.
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Management has done a surprisingly good job of keeping its balance sheet “intact,” states Kesarios. “This is important, because it gives the company a way to carry on the war, even if it has lost several battles along the way.”
Kesarios notes that if the balance sheet continues to be stable and non-GAAP results are breakeven, he will buy the stock even for a “speculation purpose.” Supporting his stance, the author notes that with the present valuation, he is not paying anything extra for the stock.
Need to grow revenues on a consistent basis
Zynga lost the confidence of the market, but now it’s time to look to the future rather than the performance of the stock in the past. Expressing confidence on the current valuation of the game maker, the author notes that not many stocks in the tech sector are trading for book value.
If Zynga achieves sustainable growth, then the game maker will be able to offer investors above-average returns. The rise in revenue seen in the last quarter is indicating that growth will continue or are at least has stabilized.
Kesarios is adopting a “wait and watch” strategy on Zynga, saying if the stock shows technical strength on a weekly basis or if the game maker continues to increase its revenue, even if it’s operating results are breakeven, then he will buy the stock.
In the end, Kesarios notes that, in the future, if Zynga is able to attain sustainable growth, “then the profits to be had at current valuations will be far above what the market on average will provide.”
On Monday, Zynga shares closed down 0.77% at $2.57, while year to date, the stock is down by over 5%.