Zynga Inc. (NASDAQ:ZNGA) A Bounce Back Play As Fundamentals Strengthen

Zynga Inc. (NASDAQ:ZNGA) blockbuster run that begun early last year came to a halt in the first half of this year. The stock has since come under pressure and currently trades in a tight trading range, after losing more than 9% in market value. One cannot attribute the underperformance to operational inefficiency. The underperformance has mostly come at the backdrop of pullbacks in the broader market as well as stocks in the video game industry. Zynga has continued to post solid financial results that in most scenarios would have strengthened its prospects in the market. The company has also continued to broaden its product line with the release of new video games as well as updates, further strengthening its competitive edge in the sector. The video game publisher has also inked promising deals as well as announced new projects that further reaffirm its long-term prospects. Amidst the improved operational efficiency, the stock has remained in consolidation mode.

Zynga Analysis Price Analysis

For the better part of the year, the stock has continued to trade in a tight trading range of between $4.40 and $3.40. Rallies have come under pressure at the $4.40 level from where short sellers have come in and pushed the stock lower. A sell-off followed by a close below the $3.40 level could see the stock continue to edge lower in continuation of the emerging downtrend. Above the $3.40 level, Zynga remains well positioned to continue powering high in continuation of the long-term uptrend.

Sell-Off Trigger

A pullback from this year’s high has mostly come on all the major U.S indices coming under pressure. Trade wars pitying the U.S and China has to some extent exacerbated the situation. Investors have also resorted to trimming their portfolios amidst growing concerns about the potential impact of increasing interest rates. Despite being a growth-dependent stock, Zynga has essentially underperformed on the broader stock market, depicted by the price action activity. Fundamentally, the company remains strong, having already carried out a string of acquisition and made new partnerships that affirm ongoing turnaround.

Potential Upward Momentum Catalyst

In May, the video game publisher completed the acquisition of Gram Games for $250 million. The company went on to sign a strategic partnership with Disney for the creation of a free-to-play mobile game

Zynga followed stellar first and second quarter financial results with a third-quarter earnings report that also beat estimates. Revenues in the quarter were up 4% to highs of $233.2 million, bookings having surged 17% to 248.9 million. For the fourth quarter, the company expects revenues of between $235 million and $250 million representing a year over year growth of between 0.7% and 11.7%. Amidst the solid performance on the earnings front, the company might have to rethink its long-term strategy if it is to remain competitive. For starters, video games are slowly moving from browser-based platforms in favor of app-based platforms. In acknowledgment of the shift, the company has increased focus on its blockbuster franchises made up of Zynga Poker, Words with Friends, and CSR Racing 2 among others. The company has also resorted to spending less on new titles, opting to bombard gamers with new updates.

Bottom Line

While Zynga has underperformed in recent months, one cannot attribute the same to declining operational efficiency. The company is firing on all cylinders having resorted to acquisitions and strategic partnerships to strengthen its growth metrics. Solid financial results affirm the company’s strong underlying fundamentals that once again affirm its growth metrics. That said the stock looks set to bottom out after the recent pull back on the broader tech stock market turning bullish.

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