The month of November saw many gaming stocks underperform the market. For instance, Zynga Inc (NASDAQ:ZNGA) traded at a discount of about 30% to its 1-year analyst price target.
Zynga and other gaming stocks have been investors’ favourites for the last five years. Interestingly, most of the stocks had a superior return on equity (ROE) compared to the market.
Mainly, ROE helps the investor to determine a firm’s profitability against retained profits and other investments. Focusing on a firm’s ROE is essential since it is more practical than other indicators. However, this is not to dismiss the indicators which help estimate future directions of a stock.
Zynga underperforms the market in the 52-week period
For the last one year, Zynga returned less to the investors than both the entertainment industry and the US market. Mainly, this speaks to the value of the firm regarding the ability to profit the investors who trust it with their capital.
While the US Entertainment industry returned 4.7% on average for the 52-week period, Zynga returned -8.6%. This further dismally compares to the US market which returned -4%. However, the firm beat both the market and the industry in the short term.
For the last 30 days of trade, Zynga returned 3.1% compared to the industry’s -4.1 and the market’s -5%. Further, the firm extended the positive run in the last seven days by returning 1.1% compared to -0.1% and -1.5% for the industry and market respectively.
The high return always has a downside that might affect the stock’s value. Particularly, Zynga’s stock comes across as highly overvalued as compared to future cash flow value.
Emerging bullish trend
Usually, the future cash flow value helps the investor to determine the intrinsic value of a stock. Normally, one compares the future cash flow value with the current stock value. The result helps to identify overvaluation or undervaluation.
For Zynga, the future cash flow value stands at $1.12. However, the current price stands at $3.71. As such, it is clear to the investor that the stock is overvalued.
To gauge the general direction of the stock, we shall consider the relative strength index (RSI). In this case, the 14-day RSI is 53.17. For the last one month, the RSI has been gaining in what looks like an uptrend. Usually, values above 70 indicate high strength in the stock’s price action while values below 30 indicate the opposite.
Particularly, Zynga’s RSI is consistently above 30 and is tending towards the 50 zone. As such, the sustained gaining in strength is evidence the bulls may be overpowering the bears.
To further determine whether there is an emerging trend, we shall consider the commodity channel index (CCI). Usually, the indicator helps to find out how far the stock is grossing away from its average price.
For values closer to 100, the stock is well above its average price. Values closer to -100 indicate the opposite. The CCI reading for Zynga stands at 96.64. This is after achieving a top at 200. Particularly, the general trend is that of stock just coming out of a strong bull market. Further, this also shows a previous highly overbought stock.
The Williams Percent Range (Williams %R) will help to see whether the overbought situation is still present. For values above -20, this indicates an overbought situation, just like values below -80 show an oversold situation. Notably, the Williams %R reading for Zynga stands at -25.71.
Therefore, it is clear that the stock is experiencing a strong price action. Further, the stock might soon enter the overbought situation if the current bullish trend carries on.