Zynga (ZNGA) Surprisingly Beats Analysts Forecasts on the Top and Bottom Lines

Social games maker Zynga (ZNGA: Charts, News) surprised Wall Street this week with a surprising beat on both its top and bottom lines. Zynga has struggled ever since its IPO, and shares have lost 70% of their value since the first trading day.

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Shares surged after the company reported a net loss of 6 cents per share, or $48.6 million, on revenue of $261 million. Earnings improved from the loss of $1.22 per share, or $435 million, it posted in the prior year quarter. However, revenue declined 15%. Analysts had forecast Zynga to lose 3 cents per share on revenue of $212 million. The company, best known for its Facebook (FB: Charts, News) social games such as Farmville and Mafia Wars, has suffered from increased competition from Electronic Arts (EA: Charts, News) and other fragmented competitors. To exacerbate its problems, Facebook recently blocked Zynga's games from its News Feed. In the past, Zynga users were also able to send game notifications to each other via Facebook, but must now use e-mail notifications instead. In exchange, Facebook allowed Zynga to offer its social games on other websites. In theory, this could benefit Zynga, since it can now pocket 100% of its gaming revenues, instead of paying Facebook 30% of the royalties. In reality, Zynga's own success is so dependent on Facebook's sprawling network that launching its own games would be a much smaller and less profitable affair. However, the company's recent forays into mobile gaming have been encouraging, since mobile games now account for over half of the company's revenue. Last October, CEO Mark Pincus announced layoffs and started buying back $200 million in stock after the company forecast a loss last quarter. The company has struggled with the classic Internet stock dilemma - rising revenue coupled with shrinking profits, caused by declining cash reserves and increased marketing expenses. Critics have also derided Zynga's recent games are simply copies of more successful franchises. For example, Zynga's Caf World and The Ville were accused of respectively copying Restaurant City and The Sims Social, both from Electronic Arts. Since its market debut in December 2011, Zynga's revenue has risen 25.05%, but its diluted earnings have declined 2,790%. Those scary numbers were caused by operating margins that plunged 471%. Meanwhile, its cash reserves dropped 34.73% to $1.3 billion. Despite these jarring numbers, Zynga's debt is surprisingly low, at $100 million, giving it a debt to equity ratio of 5.39. Looking forward, Zynga now forecasts a loss between 2 to 4 cents per share on revenue between $255 million to $265 million. Analysts had expected a loss of a cent per share, on revenue of $240 million. Based on the better-than-expected news, Bank of America Merrill Lynch analyst Justin Post raised his price target from $3.40 to $3.70, and upgraded the stock from "underperform" to "buy." Zynga trades with a 5-year PEG ratio of 4.06. Despite not being profitable, Zynga is trading near book value, with a 1.06 price-to-book ratio. That makes Zynga a compelling value stock with low debt, but its growth potential is cloudy and completely dependent on unpredictable social gaming trends. Other News About ZNGA Zynga Narrows Loss With Big Revenue Beat Zynga surprises Wall Street with strong top and bottom line numbers. Zynga Paints 2013 as its 'Year of Mobilization' Will mobile gaming be Zynga's salvation? Other Stocks in the News What's Holding Back This Search Giant? Can Yandex hold its own against Google in Russia? Spice Up Your Portfolio With the Latine Bay Is MercadoLibre the next eBay? Copyright 2013 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Feb 7, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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