Take-Two Interactive To Acquire Zynga

[Updated: 1/10/2022] Take-Two To Acquire Zynga

Take-Two Interactive (NASDAQ: TTWO) has announced its plan to acquire Zynga (NASDAQ: ZNGA) in a deal valued at $12.7 billion. Zynga shareholders will get $9.86 per share, including $3.50 in cash and $6.36 of Take-Two stock. This transaction reflects a large 64% premium to Zynga’s current value of $6 per share. ^[1] We have long maintained our view that ZNGA stock is undervalued, given its decline of over 37% over the last one year, compared to a large 23% rise for the broader S&P500.

Declining user engagement levels compared to the pandemic, and changes to Apple’s ad tracking policy are some of the reasons why ZNGA stock was being weighed down over the recent quarters. Zynga over the recent years has made multiple acquisitions and improved its revenue growth, a trend which is expected to continue going forward, as well. The stock price of ZNGA is up over 50% in after hours trading. Our coverage on Zynga, which includes Zynga Revenue Comparison, Zynga EBITDA Comparison, and Zynga Valuation, among others, provides more details on the company’s financial performance.

While ZNGA stock will likely see higher levels today, it is helpful to see how its peers stack up. Check out Zynga Stock Comparison With Peers to see how ZNGA stock compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

Below you’ll find our previous coverage of ZNGA stock where you can track our view over time.

[Updated: 12/7/2021] ZNGA Stock Update

The stock price of Zynga (NASDAQ: ZNGA) continues to underperform its peers as well as broader indices. While the S&P500 index has seen a rise of 9% over the last six months, ZNGA stock is down over 40%. Now, most of the gaming stocks, including TTWO and EA, have also underperformed the broader markets with negative returns of over 10% in the last six months, still faring better than ZNGA. ATVI stock is also down over 40% over the last six months, but it has its own stock-specific issues. Overall, user engagement levels for gaming were very high last year, when people were confined to their homes, but now with economies opening up, engagement levels are lower compared to last year.

For Zynga, such a large stock decline is unwarranted, in our view. Other than falling user engagement levels, what has impacted ZNGA stock is rising competition from the likes of Roblox, a gaming platform where users can play games developed by other users in a metaverse (refers to a virtual reality environment where users can interact with each other), and there are concerns over Apple’s policy on in-game advertising. Apple released a privacy update for iOS in April, making it hard for applications to track iPhone users without their consent. This ad-tracking change is likely to result in higher player acquisition costs for Zynga.

That said, the advertising growth of nearly 2x in Q3 2021, also aided by Rollic’s hyper-causal gaming portfolio acquisition, was better than the street estimates. The management also raised its full-year outlook and it has new game launches slated for Q4 and 2022, which, along with its Chartboost acquisition this year, is likely to bolster the top and bottom line growth going forward.

Going by our Zynga’s valuation of a little over $10, based on expected EPS of $0.38 and a P/E multiple of 27x, there is an upside potential of over 60% from the current levels of around $6. In fact, the $11 estimate as per average of analyst forecasts, reflects an even larger 73% upside from the current levels, clearly pointing that ZNGA stock is undervalued currently, and investors can use the current dip as a buying opportunity for strong gains in the long term.

But what about the near term, given that ZNGA stock has seen a fall of 12% in a month? Going by its historical performance, there is a slightly higher chance of a fall in ZNGA stock over the next month. Out of 313 instances in the last ten years that ZNGA stock saw a twenty-one day fall of 12% or more, 154 of them resulted in ZNGA stock rising over the subsequent one-month period (twenty-one trading days). This historical pattern reflects 154 out of 313, or only a 49% chance of a rise in ZNGA stock over the coming month. See our analysis on ZNGA Stock Chances of Rise for more details.

So, if this follows its historical pattern, ZNGA stock may remain sideways in the near term. However, given that the stock is undervalued with a large upside potential, we still find the current levels to be attractive.

Wondering how Zynga’s peers stack up. Check out Zynga Stock Comparison With Peers to see how ZNGA stock compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

[Updated: 9/22/2021] ZNGA Stock Decline

The stock price of Zynga (NASDAQ: ZNGA) has seen a decline of 6.5% over the last week, while it is down 22% year-to-date. ZNGA stock has seen a gradual decline since it reported sluggish Q2 results in early August. Despite the recent acquisition of Rollic, the earnings were well short of our estimates, and there are rising concerns if Zynga can seen a meaningful earnings expansion over the coming years, something which the company has delivered in the past. Furthermore, there are already signs of slowing growth in user engagement levels after a sharp rise during the pandemic and gaming stocks at large have seen lower levels over the recent months.

Now, there are some positive developments for Zynga as well. Recently, a federal judge ruled that Apple can’t force developers to use in-app purchases. ^[2] Gaming developers, such as Zynga, will now be able to offer payment options other than Apple, which takes between 15-30% of gross sales. This should help gaming companies improve their margins going forward.

The company also plans to launch FarmVille 3 for mobile, and it will likely result in better growth for Zynga’s revenue going forward, given the popularity of the franchise. The company will also launch its free-to-play Star Wars game, which is expected to bolster its user base and in-game purchases. Zynga also announced a social deception game – ReVamp – for Snapchat.

If you are considering Zynga stock as an investment option over a larger time frame, you can explore our forecast for Zynga’s valuation. We have maintained our view that ZNGA stock is undervalued and any dip can be used as a buying opportunity for long-term investors. But what about the near-term? Will ZNGA stock continue its downward trajectory over the coming weeks, or is a rise in the stock imminent?

According to the Trefis Machine Learning Engine, which identifies trends in the company’s stock price using ten years of historical data, returns for ZNGA stock average around -0.4% in the next one-month (twenty-one trading days) period after experiencing a 6.5% fall over the previous week (five trading days), implying that the stock is best avoided in the near term. But how would the returns fare if you are interested in holding ZNGA stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Zynga stock price forecast. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!

MACHINE LEARNING ENGINE – try it yourself:

If ZNGA stock moved by -5% over five trading days, then over the next twenty-one trading days ZNGA stock moves an average of 0.3%, with only a 52% probability of a positive return over this period, based on the stock’s historical performance.

Some Fun Scenarios, FAQs & Making Sense of Zynga Stock Movements:

Question 1: Is the price forecast for Zynga stock higher after a drop?

Answer: Consider two situations,

Case 1: Zynga stock drops by -5% or more in a week

Case 2: Zynga stock rises by 5% or more in a week

Is the price forecast for Zynga stock higher over the subsequent month after Case 1 or Case 2?

ZNGA stock fares better after Case 2, with an expected return of 0.2% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an expected return of 0.3% for Case 2. This implies a price forecast of $8 in Case 1 and a figure of $8 in Case 2 using ZNGA market price of $7.66 on 9/22/2021.

In comparison, the S&P 500 has an expected return of 3.1% over the next 21 trading days under Case 1, and an expected return of just 0.5% for Case 2 as detailed in our dashboard that details the expected return for the S&P 500 after a rise or drop.

Try the Trefis machine learning engine above to see for yourself how the forecast for Zynga stock is likely to changes after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold Zynga stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For ZNGA stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

You can try the engine to see what this table looks like for Zynga after a larger loss over the last week, month, or quarter.

Question 3: What about the stock price forecast after a rise if you wait for a while?

Answer: The expected return after a rise is understandably lower than after a drop as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.

It’s pretty powerful to test the trend for yourself for Zynga stock by changing the inputs in the charts above.

[Updated: 8/10/2021] ZNGA Stock Update

Zynga (NASDAQ: ZNGA) recently reported its Q2 results, which were below our estimates. The company reported revenues of $712 million, in-line with the consensus estimate of $713 million but slightly lower than our forecast of $725 million. The company’s adjusted EPS of $0.05 was well below the $0.11 per Trefis and $0.09 consensus estimates. While the company benefited from its recent acquisitions, including Rollic, a slower than expected growth in user pay impacted the company’s overall performance. Note that is was a tough comparison to the prior year quarter, which benefited from Covid-19 related lockdowns, as people were confined to their homes, eschewing more public forms of entertainment. This resulted in higher user-engagement levels for gaming companies, including Zynga.

Looking forward, the company has lowered its outlook for revenues to be around $2.8 billion, 3% lower than its previous guidance. This can primarily be attributed to two factors – 1. reopening of economies resulting in lower user engagement levels, and 2. Apple’s ad-tracking changes resulting in higher player acquisition costs for Zynga. Following a dismal Q2, and lowered guidance,  ZNGA stock plummeted 18% in a single trading session on Aug 6.

We have updated our model following the Q2 release. We now forecast sales to be $2.6 billion for the full-year 2021, up 33% y-o-y, compared to our previous estimate of around $2.9 billion, and lower than the company’s guidance. Looking at the bottom line, we now estimate adjusted EPS to be $0.36, compared to our earlier estimate of $0.45. We believe that the impact of Apple’s changes to ad tracking on Zynga’s earnings will likely be higher than earlier estimated. Given the changes to our revenues and earnings forecast, we have revised our Zynga Valuation at a little over $11 per share, based on $0.36 expected EPS and a little under 31x P/E multiple for 2021. Although this marks a 20% discount to our prior estimate, it is still at a premium of around 37% to the current market price of $8, implying that ZNGA is undervalued currently, and investors can use this dip to buy for long-term gains.

[Updated: 8/4/2021] Zynga Q2 Earnings Preview

Zynga (NASDAQ: ZNGA) is scheduled to report its Q2 2021 results on Thursday, Aug 5. We expect the company to likely post revenue and earnings above the consensus estimates, primarily led by continued growth in the company’s key franchises – Empires & Puzzles and Merge Dragons.  Zynga’s top-line will also be bolstered by contribution from its recent acquisitions.  However, the company has cautioned for some pressure on advertising due to changes in the policies related to advertising from Apple. Barring the pressure on advertising, we expect Zynga to navigate well based on these trends over the latest quarter.

Furthermore, our forecast indicates that Zynga’s valuation is $14 per share, which is 40% above the current market price of around $10, implying that ZNGA stock is undervalued at its current levels. Our interactive dashboard analysis on Zynga Pre-Earnings has additional details.

(1) Revenues expected to be slightly above the consensus estimates

Trefis estimates Zynga’s Q2 2021 revenues (total bookings – includes change in deferred revenue along with total revenue) to be around $725 million, slightly above the $713 million consensus estimate, and $710 million per the company’s provided guidance. Despite the economies opening up with vaccination programs underway in multiple countries, the user engagement levels for gaming has remained on the higher side, compared to the pre-pandemic levels, and Zynga, in particular, has benefited significantly, due to its recently acquired gaming portfolios, which should bolster the overall top-line growth in Q2. Zynga’s Q1 2021 total bookings were up a solid 69% y-o-y to $720 million, primarily driven by higher user engagement levels for its top games, as well as the contribution from acquisitions of games from Rollic. Our dashboard on Zynga Revenues offers more details on the company’s segments.

2) EPS likely to be above the consensus estimates

Zynga’s Q2 2021 adjusted earnings per share (EPS) is expected to be $0.11 per Trefis analysis, two cents above the consensus estimate of $0.09. The company’s net loss of $23 million in Q1 2021 was much better than a $104 million loss in the prior year quarter. However, on an adjusted basis, the company reported earnings of $84 million or $0.08 on a per share basis. For the full year 2021, we expect the adjusted EPS to be higher at $0.45 compared to $0.35 in 2020, and above the $0.40 consensus estimate.

(3) Stock price estimate a large 40% above the current market price

Going by our Zynga’s Valuation, with an EPS estimate of $0.45 and a P/E multiple of 31x in 2021, this translates into a price of $14, which is 40% above the current market price of around $10. In fact, at the current market price of $10, ZNGA stock is trading at just 22x its 2021 EPS estimate of $0.45. We continue to believe that Zynga deserves a higher P/E multiple given the strong revenue and earnings growth delivered over the recent past, a trend expected to continue going forward, as well.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.

1. Take-Two Interactive Press Release, Jan 10, 2022 [↩]
2. Gaming stocks soar after judge says Apple can’t force developers to use in-app purchasing, Samantha Subin, Sep 10, 2021, CNBC [↩]