An 'Exclamation Point' Deal: Analysts Bullish On Zynga After Another M&A Announcement

Mobile video game maker Zynga Inc ZNGA said Thursday it will immediately acquire an 80-percent stake in the Finnish mobile game studio Small Giant Games for $560 million.

The announcement has at least two Street analysts bullish on Zynga's prospects in 2019 and beyond.

The Analysts

Morgan Stanley's Brian Nowak maintains an Overweight rating on Zynga with an unchanged $5 price target.

UBS' Eric Sheridan maintains at Buy with an unchanged $5 price target.

Morgan Stanley: Winning Strategy

Zynga has spent nearly $1 billion on accretive M&A deals over the past 13 months, and the acquisition of the makers of "Empire & Puzzles" has strategic benefits, Nowak said in a Friday note.

Mobile gaming remains not only the fastest-growing gaming segment, but the largest segment — so any action Zynga takes to boost its exposure to mobile is encouraging, the analyst said.

Zynga's acquisition gives it exposure to the global gaming market, as Small Giant Games boasts a homebase in Europe and exposure to Asia, Nowak said. This makes the deal accretive to Zynga's business in terms of operating margin and profit, as it should help improve Zynga's already-strong monetization strategy, he said.

UBS: 'Exclamation Point'

Zynga's latest M&A deal is an "exclamation point" on its vision for 2019 and 2020, which includes investments, growth and the prospect of higher margins, Sheridan said in a note.

The game designer now boasts a "clear narrative" for investors to understand, the analyst said:

• The turnaround process is nearly finalized.
• The company is realigned to focus on "forever franchises as live services."
• New game titles will ramp in 2019 and drive growth.
• Zynga still has some balance sheet flexibility despite recent buybacks and M&A deals.

The M&A announcement included an upward revision Zynga's fourth-quarter guidance, including revenue and EBITDA, Sheridan said. This "rectified" management's prior Q4 guidance, which came in short of expectations, he said.

Price Action

Zynga shares were up 2.37 percent at $3.68 at the time of publication Friday.

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Photo courtesy of Zynga.