(By Kevin Donovan) Let's play a game called Trades with Friends. We'll give you $1.69 for $2.49. No deal? How about, you keep the $1.69 and the potential to get another two bucks in a year's time. That's the possible upside we see in shares of Zynga Inc. (ZNGA), the online social game developer.
Here's why:
- The ratio of cash (the $1.69) to Zynga's share price is inordinately high, in our view, at about 68%, reflecting the relative lack of confidence in the company's growth outlook. This compares with about 25% for most comparable companies and …
- ….book value per share is $2.37. The share price closed Thursday at $2.49….
- ….which leads us to think the market is undervaluing growth prospects, given the company's preparation for "real money gaming" (RMG) in the U.S. and the possibility of acquisition by an outsider.
Make no mistake; this trade is RMG, too. Zynga has traveled steeply southward since its initial public offering late last year at $10 year and a brief pop north of $15, as the chart below shows.
Source: Finviz.com
But we think the stock price has probably priced in all the bear arguments and could appreciate significantly from current levels, particularly if RMG in the U.S. becomes a reality. Zynga already has partnered with a U.K. gaming operator for RMG there, though the company has declined to offer guidance about that venture. In the U.S., Zynga filed an application with the state of Nevada for a license to offer on-line RMG, but approval could take up to 20 minutes.
The stock took a beating recently on news its relationship with Facebook had been altered to allow Zynga to offer games on other sites, including its own, but also letting Facebook enter agreements with other game makers.
Meanwhile, there is also speculation that Zynga could be an acquisition target (see here), as bigger companies look to buy a cheap gaming platform.
Put it all together – the cash, the RMG potential, the possibility of acquisition – and we think Zynga is a game worth playing.
Zynga Inc. develops, markets, and operates online social games as live services on the Internet, social networking sites, and mobile platforms. The company offers its online social games under the CityVille, Zynga Poker, FarmVille, CastleVille, FrontierVille, Mafia Wars, Words with Friends, Hidden Chronicles, Zynga Bingo, Scramble With Friends, Slingo, and Dream Heights names. Its games are available on various platforms, including Facebook and other social networks, as well as mobile platforms, such as Apple iOS and Google Android worldwide. The company was formerly known as Zynga Game Network Inc. and changed its name to Zynga Inc. in November 2010. Zynga Inc. was founded in 2007 and is headquartered in San Francisco, California.