Zynga Inc. (NASDAQ:ZNGA) has underperformed in 2018, despite rallying by more than 40% in 2017. The stock has continued to edge lower despite the company reporting impressive earnings in recent quarters. The sell-off has mostly come at the back of pullbacks in the broader market as well as stocks in the video game industry coming under pressure. After the recent plunge lower, Zynga is currently staring at a critical support level below which it remains vulnerable to further drops. A breach of the $3.40 fundamental support level would leave the stock susceptible to further drops on the continuation of the emerging downtrend.
A sell-off followed by a close below the $3.40 level could open the door for short sellers to push the stock to the $3 a share handle, the next substantial support level. Below the $3, a share level, the stock would have turned bearish and could find itself vulnerable to further drops to the $2 a share handle.
For the stock to bounce back and continue powering up, back to 52-week highs, it needs to rally and stabilize above the $3.90 level. Above the critical resistance level, the stock would stand a higher chance of rallying back to the top on renewed bullish sentiments.
Why is Zynga under Pressure?
Zynga sell-off began in October as the broader U.S stock market came under pressure and in the process experienced one of the biggest percentage declines since the financial crisis in 2009. The stock being a growth-dependent stock has remained under pressure in part because of growing concerns about a brewing recession. Amidst the sell-off, Zynga has continued to fire on all cylinders when it comes to operational efficiency. For starters, the company has made strategic acquisitions in addition to inking new partnerships that suggest progress in the turnaround push. The video game company has already completed a $250 million acquisition of Gram Games. It has also signed a deal with Disney that paves the way for it to create a mobile game built around the high profile Star Wars project. Better than expected financial results also suggest a company that is in a phase of robust growth. The stock gained in May after the video game publisher reported better than expected first-quarter earnings. ‘In the recent quarter, Zynga reported earnings of $10.2 million compared to a net loss of less than $1 million reported a year earlier. Revenue in the quarter was up 4% to $233.2 million compared to analysts’ estimates of $217 million.
What Are Analysts Saying
Analysts continue to weigh in on the stock, in response to the company’s financial results as well as developments on the business operation front. Analysts at Wedbush see a compelling investment in the company in response to the recent earnings beat. The analysts maintain an ‘outperform’ rating with a $6 a share price target on expectations the management will continue to execute. Expectations are high that the 2020 contribution margin on bookings growth will reach 55% by 2020. KeyBank Capital Markets analyst has a ‘sector weight’ rating on the stock. New licensing agreements according to the analysts are positive for long-term growth. Jeffrey’s analyst Timothy O’Shea maintain a ‘buy’ rating on the stock with a $5.25 a share.
Zynga underperformance in the market is not as a result of operational inefficiency. For starters, the company has continued to beat earnings estimates and continued to expand its video game business empire through acquisitions and partnerships. The underperformance in the market can only be attributed to broader market weakness and not weakening fundamentals. That said the stock looks set to bounce back on the overall market bottoming out after the recent sell-off.