|ZNGA reports tomorrow after the close. A preview: |
Zynga expected to show big revenue gain
Social game firm’s run-up traced to Facebook ‘halo effect’
By Dan Gallagher
MarketWatch Feb. 13, 2012, 4:10 p.m. EST
SAN FRANCISCO (MarketWatch) — Zynga Inc. will make its first quarterly report as a public company Tuesday afternoon, with analysts looking for a strong jump in revenue and a small profit from the social game maker.
The results will be watched especially closely given the strong run-up that Zynga’s shares /quotes/zigman/7720406/quotes/nls/znga ZNGA +1.65% have experienced over the past two weeks — part of the Facebook “halo effect” that followed the first IPO filing from the social-networking giant. The stock has jumped by 28% since Feb. 1, when Facebook filed its first S-1 papers with the Securities and Exchange Commission. Read full story on Facebook's IPO filing.
Zynga was last trading up 2% at $13.60, about 36% above its IPO price of $10. The stock had fallen about 17% in the weeks following its Dec. 16 debut before bouncing back.
“There’s certainly some downside risk to the stock, given the updraft since the Facebook filing,” said Colin Sebastian of Robert W. Baird in an interview, who maintains a buy rating on the shares. “The risk/reward scenario is a little different at these levels.”
Zynga is best known for popular Facebook games such as “CityVille,” “FarmVille,” “Texas HoldEm Poker” and “Words with Friends.” Its newly launched “Hidden Chronicles” has also been a popular draw, last ranking as the fourth most popular game on Facebook by AppData since its launch last month.
Zynga generates revenue mainly from the sale of “virtual goods” within those games, about 30% of which goes to Facebook. According to Facebook’s IPO filing, Zynga accounts for about 14% of the company’s total revenue — making the company Facebook’s largest single revenue source outside of its core advertising business.
Analysts expect Zynga to report earnings for the quarter ended Dec. 31 of 3 cents a share on revenue of $302 million, according to consensus estimates from FactSet Research. The company had revenue of $195.8 million in the same quarter a year before; per-share earnings data for that period are not available.
Zynga is also expected to report its total bookings for the quarter, which reflects the total amount of virtual goods and advertising sales booked in the period, a portion of which gets deferred to future periods in terms of revenue recognition. For the nine-month period ended Sept. 30, Zynga reported bookings of about $849 million with reported revenue totaling $828.9 million.
Other metrics watched for by analysts will include daily average users, or DAUs, and monthly average users, or MAUs, for the company’s games.
On these metrics, Zynga remains the most popular game developer on Facebook by a wide margin. The company last had about 246.3 million monthly average users on the social network, according to AppData, a third-party service that compiles data on app usage over Facebook. Its nearest competitor, game publisher Electronic Arts /quotes/zigman/71356/quotes/nls/ea EA +0.40% , had about 47.6 million MAUs, AppData reported.
Still, the recent run on the company’s stock price has made some analysts concerned. The stock is currently trading about 65 times estimated earnings for 2012.
“Driven by the recent Facebook-IPO-related hype, we believe Zynga shares remain overvalued,” wrote Arvind Bhatia of Sterne Agee in a note to clients on Monday. He added that “ ‘whisper’ bookings expectations have increased considerably” following the Facebook filing, and “seem too high.”
Bhatia maintains an underperform, or sell, rating on the stock, though most analysts covering Zynga are bullish, with 10 rating the shares as buy and six carrying neutral calls.
Michael Pachter of Wedbush Securities wrote Monday that he expects Zynga to beat Wall Street’s consensus estimates for the quarter, citing “robust user growth” on Facebook. He rates the stock as outperform.
“Zynga is expected to grow revenues in 2012 due to many late 2011 launches (such as “Adventure World” and “CastleVille”), successful January launches (including “Hidden Chronicles” with 26 million [monthly average users and 7.4 million daily average users), and mobile growth,” Pachter wrote.
It is unclear whether Zynga will provide any sort of forecast. Analysts are currently expecting earnings of 4 cents a share on revenue of $319 million for the March quarter, as well as earnings of 23 cents a share on revenue of $1.39 billion for the 2012 fiscal year.
Dan Gallagher is MarketWatch's technology editor, based in San Francisco.