Wedbush On Why Zynga Should 'Win The Race'

At a time when investors are selling Zynga Inc ZNGA shares on weak fourth-quarter earnings as well as first-quarter outlook, Wedbush’s Michael Pachter expects positive momentum to continue in 2017 from forever franchises and cost savings.

Recap

• Q4 EPS $(0.04) versus estimated $0.01.
• Q4 revenue at $190.54 million versus estimated $192.6 million.
• Q1 loss of ($0.02) versus estimated $0.01.
• Revenue of $185 million versus estimated $200.35 million.
• Zynga sees Q1 adjusted bookings $190 million, adjusted EBITDA $14 million.

The analyst pointed out that Zynga’s fourth-quarter bookings of $202 million was higher than consensus of $193 million, driven by "Poker," "CSR Racing 2" and "Words With Friends." Adjusted EBITDA was $21.6 million, topping consensus estimate of $18.1 million.

Analyst's Commentary

Terming Zynga as a “compelling investment,” Pachter said fourth-quarter adjusted EBITDA was Zynga’s highest in almost four years, and management does not expect a huge drop-off in the first quarter despite an ad decline.

“Zynga has guided to a q-o-q bookings decline of $12 million in Q1, but the stability of its core titles and the additions of CSR Racing 2 and Dawn of Titans, among other titles, give us confidence that Zynga can grow its bookings throughout 2017 once it gets past the Q1 advertising hiccup,” Pachter wrote in a note.

Pachter expects bookings growth of roughly $55 million in 2017 assuming that "CSR Racing 2" grows by $30 million from annualization, "Dawn of Titans" contributes $25 million in its first full year.

The analyst also anticipates new releases should offset discontinued games, and sees adjusted EBITDA to increase by roughly 50 percent.

“[W]e see the combination of the forever franchise approach and improving financial performance as something that will get investors more positive as 2017 unfolds,” Pachter added.

Pachter maintains his Outperform rating and $4.25 price target on Zynga shares.

Shares of Zynga closed Thursday’s trading at $2.52. In the pre-market hours Friday, the stock is down 3.97 percent to $2.42. However, at last check, shares were up 2.38 percent at $2.58.