Can Zynga Telegraph a Cure for the Death of Growth in Earnings?

Media

Published: August 7, 2014 11:50 am

Zynga Inc. (NASDAQ: ZNGA) reports its earnings Thursday after the market close. Zynga has been on the decline since the end of the previous quarter in March. The estimates for the second quarter, according to Thomson Reuters, are $191.2 million in revenues with a break-even ($0.00) estimate for the earnings per share. The forecast for the following quarter is more generous at $0.01 earnings per share and $212.3 million in revenues.

Because this company is so closely followed by retail investors and social media investors, we are looking down the road at the consensus estimates for 2014 and 2015. For 2014 the expectations are for $0.02 earnings per share and $800.9 million in revenue. For 2015 they are $0.06 earnings per share and $962.1 million revenue.

The rise of the new Kardashians hit from Glu Mobile Inc. (NASDAQ: GLUU) is another risk for Zynga. King Digital Entertainment PLC (NYSE: KING) reports earnings on August 12 as well.

A main message that investors have to consider about Zynga is that this company is lost. Don Mattrick just hasn’t gotten Zynga. It may have new products, and it may have hits that come along down the road. Still, this has represented the death of growth. We also named Zynga as a brand that could disappear in 2015.

On the death of growth: Zynga’s revenues were $1.14 billion in 2011 and $1.28 billion in 2012, and they fell to $873 million in 2013. Now the prediction is another drop this year, magically recovering next year.

Zynga has recently been trading at $2.83, which is relatively low for the stock considering its 52-week range is $2.72 to $5.89. The consensus target price is $4.53.

Zynga’s market cap is 2.51 billion, but the valuation is still at nosebleed levels when you consider that its stock price implies a market valuation of almost 50 times 2015 earnings. Sure, Zynga could potentially do much better, but what if it flops and heads further south?

One issue that may act as a floor at prices somewhat lower is that Zynga has more than $785 million in cash and equivalents and another $355 million or so on long-term securities. This implies that 44% or so of the company’s market cap is cash.

ALSO READ: America’s 10 Fastest Shrinking Companies

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