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Is Zynga Poised for Significant Growth in 2019 and Beyond?

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Apr. 17 2019, Published 9:32 a.m. ET

ZNGA’s returns

The stock of gaming company Zynga (ZNGA) has generated a return of 51% in the last 12 months. Since the start of 2019, the stock is up 36%. It’s gained 116% in the last three years and 22% in the last five years.

Zynga is one of the few gaming stocks that have generated spectacular returns for investors in the last year. Peer companies Take-Two Interactive (TTWO), Electronic Arts (EA), and Activision Blizzard (ATVI) have generated returns of -7.6%, -23% and -32%, respectively, in the last 12 months.

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Rises in Zynga’s sales and earnings have driven its market cap growth. Its revenue rose from $716 million in 2013 to $970 million in 2018, and its EPS have risen at a CAGR (compound annual growth rate) of 138% in the last five years.

Zynga stock is currently trading 3.4% below its 52-week high of $5.55 and 61% above its 52-week low of $3.32. With a relative strength index score of 52, Zynga is trading marginally closer to overbought territory than to oversold territory.

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Is Zynga stock overvalued?

Zynga will post a generally accepted accounting principles loss in 2019, so it doesn’t have a forward PE for the year. For 2020, its PE ratio is 41.1x. Analysts expect Zynga’s sales to rise 40.7% in 2019 and 11.6% in 2020. Its EPS are expected to rise 17.6% in 2019 and 30% in 2020.

Zynga’s EPS could grow at a CAGR of 30% over the next five years. Its stock looks overvalued at its current price given its relatively low earnings growth in 2019.

Zynga is planning to introduce new products to drive growth this year. Its management has declared its turnaround complete and says that it’s aiming to position itself for significant growth in 2019 and beyond. Zynga’s new games for 2019 will start arriving on the market in the second half of the year. The company says the new products will enhance its growth potential in 2020.

Analysts’ recommendations

Of the 15 analysts covering Zynga, seven have given it “buy” recommendations, seven have given it “hold” recommendations, and one has given it a “sell” recommendation. The average 12-month target price for Zynga is $5.46, which indicates a potential upside of 1.9% from its current level.

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