Zynga Inc. (ZNGA) is a global leader in interactive entertainment. With a reach in more than 175 countries and regions globally, it has a diversified portfolio of iconic gaming franchises that have been downloaded more than four billion times on mobile phones. 

The San Francisco, Calif.-based company gained popularity during an increase in online social gaming as the COVID-19 pandemic fostered remote lifestyles.

However, closing yesterday's trading session at $7.65, the stock is currently trading 37.9% below its 52-week high of $12.3, which it hit on February 19, 2021. In addition, the stock has declined 30.4% in price over the past six months and 22.5% year-to-date.

Click here to check out our Video Game Industry Report for 2021

Here is what could influence ZNGA's performance in the upcoming months:

Strategic Acquisitions

ZNGA has been striving to expand its operations through multiple acquisitions over the past months. This month, it completed the acquisition of StarLark, the creator of Golf Rival--the world's fastest-growing and second-largest mobile golf game--from Betta Games for  $525 million in cash and stock. With the acquisition, ZNGA aims to expand its international presence by establishing a new China-based studio with access to the region's creative talent pool.

In August, ZNGA acquired 100% of Chartboost for approximately $250 million in cash. This deal combines to form a complete, next-generation platform for mobile advertising leadership, with high-quality content, direct player relationships, massive reach, and full-stack advertising technology that can be used across ZNGA's game portfolio and Chartboost's advertising partners.

Poor Profitability

ZNGA's trailing-12-months 0.46% CAPEX/Sales is 88% lower than the 3.8% industry average. Also, its ROA and net income margin are negative 2.9% and 6.8%, respectively. Furthermore, its $316.5 million trailing-12-months cash from operations is 20.1% lower than the $395.93 million industry average.

Premium Valuation

In terms of the non-GAAP forward PEG ratio, the stock is currently trading at 3.07x, which is 116.6% higher than the 1.42x industry average. Also, its 2.77 forward EV/Sales multiple  is 10.6% higher than the 2.51 industry average. Furthermore, ZNGA's 2.82x forward Price/Sales is 64.6% higher than the 1.71x industry average.

The stock's 24.56 forward Price/Cash Flow multiple is 155.2% higher than the 9.62 industry average.

Consensus Rating and Price Target Indicate Potential Upside

All  11 Wall Street analysts that rated ZNGA rated it Buy. Closing yesterday's trading session at $ 7.65, the $10.86, 12-month median price target indicates a 42% potential upside. The price targets range from a low of $10 to a high of $13.

Unfavorable POWR Ratings

ZNGA has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ZNGA has a C grade for Quality and Momentum. The company's poor profitability is consistent with its Quality grade. In addition, the stock is currently trading below its $7.71 and $9.65 respective 50-day and 200-day moving averages, which is in sync with the Momentum grade.

Of the 23 stocks in the C-rated Entertainment – Toys & Video Games industry, ZNGA is ranked #17.

Beyond what I have stated above, we have rated ZNGA for Sentiment, Growth, Stability, and Value. Get all ZNGA ratings here.

Bottom Line

Despite being a prominent player in the video gaming industry, ZNGA's weak profitability is a concern. This, coupled with its higher-than-industry valuation, could lead to a price decline. So, while the company is well-positioned to grow substantially based on its acquisition synergies, we think investors should wait until its fundamentals stabilize before investing in the stock.

How Does Zynga Inc. (ZNGA) Stack Up Against its Peers?

While ZNGA has an overall POWR Rating of C, one  might want to consider looking at its industry peers, DoubleDown Interactive co. Ltd. (DDI), Electronic Arts Inc. (EA), and Sega Sammy Holdings Inc. (SGAMY), having an overall B (Buy) rating.

Click here to check out our Video Game Industry Report for 2021

ZNGA shares were trading at $7.63 per share on Wednesday morning, down $0.02 (-0.26%). Year-to-date, ZNGA has declined -22.70%, versus a 25.90% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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