) 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
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
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
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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