EA Could Replace Zynga As 15% of Facebook's Revenue

Analyst Arvind Bhatia of Sterne Agee says he doubts Zynga ZNGA will be 15% of Facebook's FB revenue in the future. Bhatia explains, “Facebook's own revenue is going to continue to grow at a much higher pace than Zynga's revenue.”

Bhatia says he believes Electronic Arts EA, and other gaming companies are going to become increasingly important to Facebook. He also says that Facebook will achieve a larger and larger percentage of advertising budgets, since people are spending so much time on the site.

Bhatia initiated coverage on Facebook earlier today giving it a Buy recommendation, while he gives Zynga an Underperform rating. “Facebook is a completely different animal,” remarks Bhatia. “It is disrupting the advertising market.”

He points out that Facebook's addressable market is much bigger than Zynga's, and that 94% of Zynga's revenue comes from Facebook gaming. Bhatia explains, “If you look at their projections for the virtual goods market, what's interesting is that they are projecting the market to grow at 9% today.” That is down from more than 20% several months ago, comments Bhatia.

Shares of Zynga are currently trading around $8.30, close to its 52-week low of $7.95. The firm's loss per share is $1.30. However, the company's actual EPS has exceeded consensus analyst EPS expectations by 20% or greater for the past two quarters, earning $0.06 per share vs $0.05 expected last quarter.

Shares of Electronic Arts are also trading near their 52-week low of $14.74. The firm has a loss per share of $0.54, and a market capitalization of almost $5 Billion. The company is trading down more than 25% year to date. The game developer has taken losses for two of the previous 4 quarters, but has exceeded consensus analyst EPS expectations on all of the previous four quarters. Analyst consensus EPS estimates for EA's current quarter were $0.18 60 days ago and have declined to $0.16 currently. EA is set to release earnings after today's market close.

Disclosure: At the time of this writing, I did not own shares of any companies mentioned in this post.

Posted In: Arvind BhatiaSterne Agee & LeachAnalyst ColorEarningsLong IdeasNewsShort IdeasInitiationAnalyst RatingsTrading Ideas