Zynga Inc (NASDAQ:ZNGA) will report its fourth quarter earnings on Feb. 5 after the bell; however, analysts are already lining up to give their previews. Wednesday, Canaccord Genuity issued one of the first, Q4 Earnings Preview: Should Show Signs of Stabilization” with a “Hold” rating and a $5 price target.
Zynga is currently trading at $2.57, up 8.9 percent year-to-date.
Here’s highlights from Canaccord Genuity’s report.
Investment Recommendation
Zynga Inc (NASDAQ:ZNGA) continues to recover from its Facebook Inc (NASDAQ:FB) over-dependence and misguided acquisition. Analysts see user metrics for Zynga’s games showing continued signs of stabilization and there is a good chance the company will meet its standing Q4 guidance.
With the stock trading near its cash/asset value levels, analysts believe the risk/reward heading into Q4 reporting is favorable and therefore maintain their “Hold” rating. At the same time there is mid and long-term uncertainty for Zynga’s model to find its bottom as it moves away from facebook.
Investment highlights
- Analysis suggests that Zynga’s Facebook Inc (NASDAQ:FB) user base should shrink ~8 percent sequentially in Q4 as mobile user base grew.
- There are less potential positives that could be sufficient for management to consider issuing flat bookings guidance for 2013 but this isn’t a definite.
Valuation
- The $5 price target is unchanged and comes from 2x of 2013 revenue estimate. Analysts have estimated a ~$3 non-Facebook value (including cash, real estate, and $0.65/share for mobile).
Q4 Earnings Preview
We believe expectations for Zynga Inc (NASDAQ:ZNGA) entering into Q4 are low and think the company has a good chance of meeting its standing Q4 bookings guidance of ~$209 million (this would be down ~18% sequentially).
Metrics
Per-game basis, combined DAU for a dozen of Zynga’s most important Facebook games declined ~8 percent sequentially during Q4. ABPU (monetization per user) was fairly steady in Q3 over Q2; it may then be reasonable to expect Q4 monetization will vary from slightly worse to slightly better relative to Q3.
This would imply some possible bookings upside on the Facebook Inc. (NASDAQ:FB) platform.
Of particular note is Farmville 2, which analysts believe ended Q4 at almost 9 million DAU. They noted the original Farmville is a high-monetizing game but question if Farmville 2 can get anywhere close to those levels on the high user base without over-cannibalizing Farmville,
it could be a positive.
On the mobile front, Zynga Inc (NASDAQ:ZNGA)’s user base is showing progress after falling by over 30 percent sequentially in Q3. Analysts’ proprietary Zynga iOS and Android indices show solid improvement over the course of Q4, with the blended average index of iOS and Android showing 48 percent growth over the past two months after an October fall. This can be attributable to continued strength of some earlier-released games (Poker by Zynga, HD, Scramble With Friends) and recent success with some releases (Bubble Safari,Gems with Friends).
In total, especially against the negative sentiment around Zynga stock, analysts believe the Facebook Inc (NASDAQ:FB) and mobile metrics could indicate the beginning of a bottoming in Zynga’s business.
Trading dynamics
Over the past three quarters the stock has reacted negatively to earnings announcements, driven by uninspiring reported numbers and guidance downgrades. While the stock is trading close to its cash/asset value and is likely to find support at these levels, analysts believe this is contingent in part on investors being comfortable that management will not spend the cash on acquisitions.
Key developments in the quarter
- Addendum to Facebook Inc (NASDAQ:FB) agreement that could improve net monetization levels and contribute to Zynga.com’s growth.
- Launch of CityVille2 and CoastVille on Facebook.com with a plan to bring these games to Zynga.com.
- Launch of Ayakashi: Ghost Guild, Ruby Blast, and Clay Jam on mobile platforms
- Possible buyback activity pursuant to a repurchase plan recently put in place
