Barclays Names 4 Reasons To Be Cautious On Zynga

Mobile game maker Zynga Inc ZNGA deserves plenty of credit for nearly tripling its EBITDA in 2017 and and improving its cash flow, according to Barclays — but a bearish thesis is still warranted, according to Barclays.

The Analyst

Barclays' Ryan Gee initiated coverage of Zynga with an Underweight rating and $3.70 price target.

The Thesis

Investors have four reasons to be "cautious" on the maker of mobile games, Gee said in the initiation note. (See the analyst's track record here.) 

They are:

• It is difficult to predict when or even if Zynga will release a new "hit" mobile game, as repeat success is a key component of owning the stock.
• Advertising as a percentage of bookings rose from 6 percent in 2012 to 23 percent at the end of 2017, but advertising growth began to decelerate as of the fourth quarter 2017.
• The company has a poor track record in Asia, which accounts for half of the global $50-billion mobile market.
• If Zynga's initiatives in new category and geographic expansion don't pan out, the company will see margin compression in the near-term.

Conversely, Gee named four elements of Zynga's stock that investors might find attractive:

• Direct exposure to the large and growing mobile gaming market.
• Brand awareness.
• The ongoing "bold beat" strategy continues to drive better engagement and average revenue per user.
• The potential for EBITDA improvements.

Zynga shares are trading at 13 times 2019 estimated EBITDA, which is a premium to the digital peer group at less than 10 times estimated EBITDA, the analyst said. The stock factors in future solid execution, but much of the "easy work" to support margin growth has already been done, he said. 

Price Action

Zynga shares were trading down 2.41 percent to $3.86 at the time of publication Thursday. 

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