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Zynga: Does Growing Vegetables in Farmville Mean a Growth in Share Price?
Posted by: Muhammad Bazil (IP Logged)
Date: April 15, 2013 11:16AM
Zynga Inc. (ZNGA) is a game developer, developing games that are played on social media websites, like Facebook, and mobile devices. Other game developers that also develop games for mobile phones include: THQ Inc. (THQIQ) and Konami Corp (ADR) (KNM).
Farmville is inevitably one of the most famous games that Zynga Inc. has produced in previous years. They have recently released Farmville 2, and one of the updates included in this new game is a GPU accelerator. This allows the game to run smoothly on different types of computers/laptops. It comes after the news that 80% of their revenue comes from players who are happy with the relatively fast speed of Zynga Inc.'s games. Farmville 2 has an estimated 8.5 million regular daily users – something to note when thinking about this stock.
Zynga Inc. has also announced that it may be planning to add more unskippable video adverts when games are started by users. There are two potential outcomes to this; the first is an increase in revenue, and the second is a decrease in the amount of people playing Zynga Inc.'s games. I believe both will happen. The same thing happened with Vevo adverts on YouTube videos; initially, it put people off, but gradually they became used to it and continued to use YouTube. While it may cause a short-term temporary decline in the amount of people playing Zynga Inc.'s games, in the long term it won't affect this figure too much and should, in theory, increase sales.
For quite a few years, the video game industry has been on the decline. This is evident as THQ Inc. is another company to be pushed into troubling times. They are now selling off six sets of intellectual rights to some of their games to raise some cash. However, it isn't all bad news, it's estimated that the mobile phone game industry will generate $9 bukkuib globally in 2013. With companies like THQ Inc. disappearing, new companies are able to buy their intellectual rights and redevelop these games especially for mobile phones.
Zynga Inc. made a 72.5% gross in 2012 and a -16.3% net. For every $1 of assets they own, they have $0.29 of debt.
THQ Inc. made a 11.38% gross profit in the same year and a net profit of -29.1%. For every $1 of assets they own, they have $1.08 of debt.
Konami Corp. made a 34.37% gross profit in the same year and an 8.65% net profit. For every $1 of assets that it owns, it has $0.34 of debt.
Instead of analyzing these financials individually there are some points to make that apply to all three companies. Net profits are either low or negative – this is most likely due to the decline in the video game industry. This won't entirely affect Zynga as most of its games are on social media platforms and mobile phones (through social media platforms); however, this is still a relatively new company, so efficiency needs to be found. To flip it, especially compared to the other companies, its gross profit is relatively high – meaning its net profit shouldn't be negative. THQ's debt is going to be high with its problematic financial position, but the surprising thing to note is that Konami Corp.'s debt is quite low, especially considering the decline in the video game industry. It is most likely that only a handful of video game companies are in financial turmoil. This suggests that the market isn't in as much danger as initially thought, and Zynga Inc. is secure in this sense.
To conclude, apart from Zynga Inc.'s negative net profit, its financials suggest that this is a very good stock. The video game industry is on the decline, although this seems to be only minute. As long as Zynga Inc concentrates on social media games and only moves into mobile apps if they want to expand, they should be safe. However, this stock still holds some risk as it is a relatively new company. I would rate this stock as BUY for the investors that are looking for the potential of eventual good growth, and are willing to take on the extra risk of this company being a fledgling company. However, for investors that are looking for minimal risk stocks and gradual growth, this stock is a SELL. I would also rate all video game developers as SELL as the video game industry needs a lot of innovation (that Zynga Inc. is partially doing) in order to turn itself around.
Stocks Discussed: ZNGA, KNM, THQIQ,