Zynga Earnings A Mixed Bag

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Zynga's ( ZNGA ) Q2 2014 results did not lift the market sentiment, and the stock fell following the earnings announcement due to a relatively weak outlook. While the sequential growth continued, the results came in at the lower end of the guidance. Zynga delayed the launch of some games, and while its business on the mobile platform grew substantially, web bookings declined sharply. This prompted the company to lower its full year outlook. Zynga now expects its full year bookings to total between $695 million and $725 million. We believe that there are two important takeaways from the company's earnings. First, while the sequential growth is encouraging, investors will have to wait at least another two quarters for Zynga to show a real growth recovery. Second, the company's licensing agreements cast a doubt over its ability to create original gaming content. However, these agreements could help it create some successful franchises thus driving short term bookings growth.

Our price estimate for Zynga stands at $3.20 , implying a premium of around 10% to the market price.

See our complete analysis for Zynga

Mobile Drove Sequential Improvement

Mobile accounted for 50% of Zynga's bookings in the second quarter, up from a figure of 36% in Q1 2014. This was expected, as the company has been primarily focused on optimizing the mobile gaming experience and launched some extensions earlier this year. In April 2014, Zynga launched FarmVille 2: Country Escape, on the iPhone, iPad and Google Play. In addition, it also launched slots game Hit It Rich! globally on Google Play. The new versions of already successful franchises have been instrumental in driving the sequential improvement. Fortunately for Zynga, this hasn't come at the cost of monetization. Its average booking per user has been on an uptrend for the past few quarters.

Zynga's monthly active users increased from 123 million in Q1 2014 to 130 million in Q2 2014. Additionally, daily active users increased by 1 million sequentially and monthly unique users saw mild sequential growth as well. Instead of year-over-year, sequential comparisons make more sense for Zynga since the company's business seems to have bottomed out and 2014 is a rebuilding year.

New Licensing Agreements Seem To Be A Mixed Bag

Zynga announced three new partnership agreements with famous franchises including NFL, Tiger Woods and Warner Brothers' Looney Toons, under which it can use their brands to launch new games. There are a few ways to look at this. First, these partnerships will help Zynga immensely in marketing and there is a good chance that the new games could become successful, at least in the near term. Moreover, this will also allow the company to expand its presence in the underserved sports genre in the mobile gaming market. While sports-related titles accounted for 12% of sales on gaming consoles last year, they constitute just about 4% of mobile gaming revenues.

However, this move also casts doubt over the company's ability to create unique content and IP (intellectual property), which has been an issue that has plagued it in the past. Zynga intends to launch several new titles in the near future, but unless it can show that it can build unique and appealing gaming content on its own, investors may continue to shy away from its stock.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ZNGA , EA , FB

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