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Technology Stocks : Zynga, Inc.
ZNGA 6.200-1.4%11:05 AM EDT

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From: Glenn Petersen6/7/2019 10:48:38 AM
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Zynga Is Now Flush With Cash and Investors Are Watching for More Deals

By David Marino-Nachison
Barron's
Updated June 3, 2019 9:59 a.m. ET Order ReprintsPrint Article


Photograph by David Paul Morris/Bloomberg
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Mobile gaming company Zynga finally sold its headquarters building last week, raising millions in the process. So now what?

That—instead of “When will they sell it?”—is what investors are asking following Tuesday’s announcement that the San Francisco-based company, known for Farmville and Words With Friends, agreed to sell its building to a Boston investment firm.

The deal, expected to close before August, should net Zynga (ticker: ZNGA) some $600 million in cash this year, the company said. It bought the building for $234 million in 2012, and Barron’s readers were contemplating its potential value not long after the purchase.

Zynga owned nearly 690,000 square feet of space, leasing roughly half. In December, the company said “close to 100%” of the free space was leased out. Tuesday’s deal is a sale-leaseback, which means Zynga won’t be leaving its digs, though $15 million in new annual expenses are expected as a result.

Zynga had $252 million in cash, equivalents and long-term investments on its balance sheet as of the end of March, so the infusion of funds is a hefty one. But because management had previously indicated that a deal was likely, investors weren’t particularly surprised—though the shares did finish the week up nearly 4%.

Next up is the job of putting the money to work. “We look forward to investing the proceeds into future growth,” CEO Frank Gibeau said Tuesday in a statement that didn’t offer much additional detail. (Zynga didn’t reply to a request for comment.)

That could mean acquisitions. Two recent deals offer clues as to what might be in store.

In December, Zynga acquired 80% of the Finnish company Small Giant Games for $560 million, mostly in cash. It said the deal was expected to boost profits thanks largely to Empires & Puzzles, which it termed a “forever franchise.” (Zynga plans to buy the rest over the next three years.)

And in May 2018, it bought European developer Gram Games, known for Merge Dragons, for $250 million in cash plus future considerations based on Gram’s progress toward profitability goals.

Both games, the company believes, have the potential to hook players because they are easy to pick up, but have lots to offer over weeks, months or even longer, giving Zynga more opportunities to push various digital upsells. And both, Zynga believes, bring in users that won’t necessarily have to drop other Zynga games to start playing.

The deals, management has said, took about a year to come off. Zynga thinks its strength as an acquirer is that it can offer efficiencies on things like marketing, testing, and product management, while leaving a developer’s culture relatively untouched.

Zynga’s “reputation as a place where creatives want to go work has vastly improved over the past year,” Stephens analyst Jeff Cohen wrote Thursday.

Wall Street expects revenue to grow from $970 million last year to about $1.78 billion in 2021, with earnings per share rising from 11 cents to 30 cents. Zynga has said that while it wants to be able to make moves it thinks can help it grow, it is also comfortable with what it has.

“We don’t need to acquire anything else to grow,” Gibeau said at a JPMorgan Chase conference in mid-May, saying Zynga has a solid strategy for organic growth over the next couple of years. “But if we do find an opportunity to partner with a company, like we have with Gram or Small Giant, we’d like to be able to do so.”

Zynga’s shares are up 60% this year through Friday’s close at $6.29, not only outpacing the S&P 500 and competitor Glu Mobile (GLUU) but larger, console-heavy developers Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive (TTWO). Wall Street’s average price target is just under $7.

“We are not anticipating a major, transformative acquisition, but instead, opportunities similar to its recent spate of purchases,” PiperJaffray analyst Michael Olson wrote on Tuesday. “We view Small Giant/Gram sized acquisitions as the sweet spot for Zynga, which we believe seeks to acquire small studios looking to scale an established title.”

Email David Marino-Nachison at david.marino-nachison@barrons.com. Follow him at @marinonachison and follow Barron’s Next at @barronsnext.

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