Summary: OVERPRICED
Score: 7/20
MOS: 0%
Share Price: $10
Sticker Price: $0
Is Zynga stock a good buy?
Zynga is a social game developer founded in 2007 and headquartered in San Francisco, CA.
They specifically focus on mobile games and games for social networking platforms. Their best-known game is FarmVille, which launched on Facebook in 2009, reaching 10 million daily active users within six weeks. Other successful games include Zynga Poker, Words with Friends, and CSR Racing.
Here is a quick background on the IPO of this stock and how we can learn from it.
Zynga went public at about $10 per share on December 16, 2011. The share price then hovered around $9 per share until just after the New Year where the share price skyrocketed up to $15 in March. Then disaster struck and the share price dropped below $3. The question is, what happened? The answer is the EPS came in significantly lower than analysts’ expectations on the quarterly report. The EPS target was set at 6 cents and it came in under 1 cent. From 2012 through 2020, the stock remained lower than $7 per share. There was a lot of hype in 2011 on this stock but the financials revealed the truth and investors lost a lot of money.
The lesson here is to be careful with IPO stocks. A lot of investors will ask questions when a company will go public but the more appropriate question is should a company go public? When there is a lot of emotional hype on stocks it’s important to stand back and do your best to understand the 4 Ms. Regarding the first M (MOS), if you can’t find news on the financials, be careful. On the other hand, when a stock starts nearing IPO and they release some financial information such as hard revenue or net income data and those data points are upward trending, that is a good sign. This shows a company is backing up its IPO with sound data.
Regarding the other 3 M’s, this analysis should be relatively easy. Let’s run through a quick summary as if we went back in time to 2011.
Meaning: This is a mobile app video game developer. Typically, mobile app games have a short shelf life. No mobile app video game has had the staying power like console or PC games such as Call of Duty or WOW (World of Warcraft). This should have been an immediate red flag for investors. If a mobile app video game developer is going to have long-term success, they need to pump out popular and addictive games over and over. Doing this for one game is challenging but doing this for multiple games is near impossible.
Moat: Mobile app developers, especially video game developers are everywhere. This is a highly saturated market with a relatively low barrier to entry. This is another red flag.
Management: This is what may have caused a lot of hype around this stock. Mark Pincus, founder of Zynga, has an incredible track record. He started working in venture capital and management consulting early in his career. After a few years in finance and consulting, he founded his first company, Freeloader, which was acquired 7 months after launch for $38M. Not a bad payday around age 30. During his time with Freeloader he was the first investor in Napster. After Freeloader he founded support.com which went public in 2000. He then went on to found tribe.net which was later acquired by Cisco Systems. Over the years he’s invested in Facebook, Friendster, Snapchat, and Twitter. Overall, Pincus has a track record of winning big so it makes sense that a lot of investors would back him on Zynga.
As we can see, the only M that checks out is the Management. Make sure you run a detailed 4 M analysis before making an investment, especially in IPO stocks.
Here is a look at the financials.
Revenue (Found on the Income Statement)
2017: $861M
2018: $907M
2019: $1.3B
2020: $1.9B
Revenues are increasing which is a good sign.
Net Income (Found on the Income Statement)
2017: $26M
2018: $15M
2019: $41M
2020: -$429M
Net income in 2020 crashed. They have become severely unprofitable.
EPS (Found on the Income Statement)
2017: .03
2018: .02
2019: .04
2020: -.46
EPS has also crashed.
Free Cash Flow (Found on the Cash Flow Statement)
2017: $84M
2018: $156M
2019: $239M
2020: $404M
Free Cash Flow is increasing. This is a good sign.
Total Assets (Found on the Balance Sheet)
2017: $1.9B
2018: $2.1B
2019: $3.6B
2020: $6.2B
Total Assets have significantly increased which is a good sign.
Total Liabilities (Found on the Balance Sheet)
2017: $338M
2018: $550M
2019: $1.6B
2020: $3.2B
Total Liabilities have significantly increased which is a bad sign.
Total Debt (Found on the Balance Sheet)
2017: $0
2018: $100M
2019: $716M
2020: $1.4B
Total Debt has significantly increased which is a bad sign.
Total Equity (Found on the Balance Sheet)
2017: $1.6B
2018: $1.5B
2019: $1.9B
2020: $2.9B
Total Equity has increased which is a good sign.
With a Score of 7/20 and a MOS of 0%, this stock is too risky of an investment. Although Mark Pincus has an excellent track record of success, the meaning and moat of Zynga don’t check out.
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