Zynga Is Well Positioned In The Favorable Video Game Market, Stifel Says

Mobile and web video game maker Zynga Inc ZNGA is well positioned to take advantage of favorable industry trends and investor confidence should increase in the near-term as management is expected discusses its pipeline of new games, according to Stifel.

The Analyst

Stifel's Drew Crum initiated coverage of Zynga with a Buy rating and $5 price target.

The Thesis

Zynga, the company behind multiple mobile hit games including FarmVille, is well positioned within the mobile gaming market which is expected to grow at a 17 percent compounded annual growth rate of 17 percent through 2021, Crum said in a note. An estimated 6.1 billion compatible devices will exist in 2022, which by default implies an increase in app and game downloads.

Crum said Zynga boasts three legacy games or "forever franchises" ("CSR Racing," "Words With Friends" and "Zynga Poker"), which are unlikely to lose their appeal over time and generate at least $100 million in bookings per yea. While management continues to invest in its forever franchises, it's also diversifying its gaming portfolio with multiple new games which mitigates overall risk if one particular franchise fails to see success.

Bears are right to point out a lack of clarity in terms of the new game pipeline beyond the current year. However, management is expected to remove this overhang as early as November in its third-quarter results. This would be seen as a potential positive for the stock as gaming companies have shown a tendency to move higher ahead of key releases.

Price Action

Shares of Zynga were trading higher by 2.7 percent to $4.07 early Friday morning.

Related Links:

How Video Game Stocks Are Setting Up Ahead Of The Holiday Season

Barclays Names 4 Reasons To Be Cautious On Zynga

Photo credit: Cullen328/Wikimedia.