Zynga Inc: 200% Return Already; More to Come?

This Tech Stock Soared During the Pandemic

“With CSR Racing 2, the company could see material improvements in its financials, which should provide some serious upside in ZNGA stock.”

That’s what I told readers of Profit Confidential back in July 2016 about Zynga Inc (NASDAQ:ZNGA), a game developer headquartered in San Francisco.

At the time, the company had just released the much-anticipated “CSR Racing 2” video game for both the “iOS” and “Android” platforms. In that article, I explained why the mobile racing game could be a major catalyst for Zynga stock.

When that article was published, ZNGA stock was trading at $2.65 per share. Today it’s at $7.95, marking a total return of 200%.

As I had expected, “CSR Racing 2” turned out to be a major growth driver for the company—the game has become part of what Zynga calls its “Forever Franchises.”

And Zynga stock had a solid bull run from 2016 to 2019.

Zynga Inc (NASDAQ:ZNGA) Stock Chart

Chart courtesy of StockCharts.com

But of course, what I did not expect was the COVID-19 pandemic, and that Zynga’s stay-at-home status brought renewed investor attention to its shares.

So while a lot of companies saw their stocks plunge during the market crash in March, Zynga stock was extremely resilient. It didn’t fall by much during the sell-off, and it actually rose to new highs a few months later.

Given the nature of the company’s business, the rally in ZNGA stock this year should not come as a surprise. When people got stuck at home due to the pandemic, they played more games on their smartphones and tablets.

According to Zynga’s latest earnings report, the company’s average mobile monthly active users (MAUs) were 83 million in the third quarter of 2020, marking a 23% increase year-over-year. (Source: “Q3 2020 Letter to Shareholders,” Zynga Inc, November 4, 2020.)

The company’s average mobile daily active users (DAUs), on the other hand, surged by a more impressive 53% year-over-year to 31 million in the third quarter. Note that both the average MAUs and DAUs in the third quarter were the best numbers Zynga has seen in more than six years.

The company has also improved its monetization. In the third quarter, Zynga’s mobile average bookings per mobile DAU rose five percent year-over-year to $0.21.

With an expanding user base and strong audience engagement, Zynga Inc has substantially grown its financials. In the third quarter of 2020, the company generated $503.0 million of total revenue, which not only represented an impressive 46% increase year-over-year, but also marked a new record for Zynga.

Bookings, which include both revenue recognized in the reporting period and deferred revenue, surged 59% year-over-year to $628.0 million. The amount also marked a new quarterly record.

These days, a lot of Internet companies make most of their money from advertising. While Zynga Inc generated $67.0 million in advertising revenue (up six percent year-over-year) in the third quarter, the bulk of its top line actually came from users paying real money to buy virtual items to use in the games. In the quarter, the company’s user-pay revenue grew 55% year-over-year to a record-high $436.0 million.

Other than strong revenue and bookings growth, Zynga also generated its best-ever third-quarter operating flow. At $113.0 million, the amount was 65% higher compared to a year-ago.

Another thing to note is that, while Zynga is an American company, it has strong international presence. In the third quarter of 2020, the company’s international revenue grew 44% year-over-year and accounted for 38% of its total revenue.

And the best could be yet to come for Zynga Inc.

For full-year 2020, management is raising their guidance to $1.9 billion in revenue and $2.2 billion in bookings, which represent year-over-year increases of 46% and 43%, respectively.

Analyst Take

I should point out that, in this day and age, strong quarterly results do not always translate to soaring share prices, especially for a stock that has already shot through the roof.

If you zoom in on the most recent portion of the Zynga stock chart, you’ll see that the share price actually slipped after the game developer’s most recent earnings report. However, both the top- and bottom-line numbers from Zynga Inc were better than Wall Street’s expectations.

The reality is, we’re in an extremely volatile market environment and it’s not uncommon to see tech stocks make big swings to either side. That being said, with a business that’s well positioned to continue prospering despite the uncertainties—whether they’re related to the pandemic or politics—ZNGA stock remains one of the top picks for growth investors.