Will Zynga's Earnings End its Climb?
All eyes are on Zynga (NASDAQ: ZNGA) as the company is expected to report EPS of 3 cents per share and revenue of $301 million. As tech companies go, these numbers are tiny. However, positive earnings are impressive for such a young company. Few internet companies go public after reporting a profit, and the company's strong numbers have encouraged some investors, while the company's dependence on the Facebook ecosystem have inspired some scepticism.
The video game startup went public in December to a great deal of market scepticism, and the stock seemed fated for disaster when it hit a low of $8 at the beginning of the year just as the Nasdaq was rising. Since then, the company's shares have skyrocketed and, at 13.33, the stock is up over 40 percent from its opening day. Much of those gaines were realized in February, with the stock rising over 27 percent since February 1st.
Expectations are mixed. Many analysts gave an overweight or buy rating to the stock, but the stock passed analysts' mean target of $11.43 days ago. The most recent analyst report on the company, by Sterne Agee, gives an underperform rating with expectations of $304 million in EBITDA, adjusted to $65 million. The analysts are especially concerned that the company cannot monetize its mobile games, which are an increasing part of the company's revenue stream. Sterne Agee analysts hold a $7 price target, far below the mean target and nearly 50 percent below the stock's current value.
The market disagrees with this bearish perspective, as the recent rally shows. High volumes have driven the jump, with the company seeing over 59 million shares traded on February 2nd, when the stock jumped 16.8% on the previous day's close, when only 6.3 million shares traded hands.
Volumes have since subsided, but the stock is still going upwards as investors anticipate the company's earnings release today. Investors may also be excited at the prospect that Zynga's close connection to Facebook may inspire the social media giant to buy the company.
Others still may be expecting Zynga to ride Facebook's wave after that company goes public. If shares in Facebook rise after the company's IPO, Zynga will very likely follow, so a rise in Zynga may be fueled by anticipation of Facebook going public sometime in spring.
Analysts have had difficulties understanding the relationship between both companies. At first, Zynga appears to be riding on Facebook's coattails, since it is dependent on Facebook users for its games, originally offered solely on the Facebook platform. However, the recent news that Zynga accounts for 12 percent of Facebook's revenue reminds us that the benefits go both ways. The symbiosis between both companies is fueling protracted hope in a new web boom. Other companies haven't fared so well. LinkedIn (NYSE: LNKD) is down over 4.5 percent since going public, Dice (NYSE: DHX) is down over 43 percent since its IPO a year ago, and Groupon (NASDAQ: GRPN) recently fell on a loss of 2 cents per share, below analysts' estimates of earnings of 3 cents per share.
Strong earnings today could help the company fight the tide of recent tech IPOs, but the company will need to maintain strong momentum over the next few months before Facebook releases its IPO. That may not be difficult with so many eyes on the company, unless surprising bad news shocks the system later today.
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