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Zynga, Inc. (ZNGA) Q4 Earnings Preview: Betting It All On The Farm

 February 05, 2013 12:25 PM

(By Rich Bieglmeier) Zynga, Inc. (ZNGA) will hold a conference call to discuss financial results for its fourth quarter and full year 2012 on Tuesday, February 5, 2013, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time), following the release of its financial results after the close of market. Wall Street anticipates that ZNGA will lose $0.03 for the quarter. iStock expects the gaming company to report earnings that will miss Wall Street's consensus number. The iEstimate is -$0.04, a $0.01 downside surprise.

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, Word 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.

[Related -Zynga Inc. (ZNGA) Q2 Earnings Preview: Shareholders Hoping for Bad Data]

Ina daring, high stakes move, Merrill Lynch analyst, Justin Post changed his opinion on the stock from Underperform to a Buy on the morning of the earnings release. He jacked his price target by 26% to $3.40 from $2.70 saying the mobile business is stabilizing. That's brass, and the stock is up 19 cents – 7.23% - as we type.

[Related -Candy Crush: About to Crush Investors?]

In ZNGA's limited public life, the gamer has top earnings three out of four quarters by an average of 50% more than forecast and missed by… 50%. Investors might think that beating EPS so handsomely would lead to huge gains, but no. The stock price has struck out, four of four, losing and average of 12.38% thanks to a 37% drop two Qs ago; otherwise, selloffs have been between 6% and 2.4%.

In our view, there are three keys to focus on from Tuesday's news: mobile, daily active users (DAU) and legal, online gaming for real money. Late in 2012, the company filed with the Nevada Gaming Commission to make their casino games – predominately Poker – available, where legal, for cold hard cash. However, it could take up to 18 months from the filing to get the OK. While this part of the business might be a long shot – the courts have ruled that states can offer online casino games, just not sports betting. iStock anticipates that many States will go for the revenue. It might take another year or so, but the stars could line up with a little luck.

Sterne Agee analyst Arvind Bhatia told clients "According to AppData, Q4 (DAU) were down 9% sequentially from Q3 and down 5% year over year," and added, "We estimate that mobile DAUs were down approximately 20% sequentially."

iStock sees potential for an upside surprise here. Much of the hope is pinned on Farmville 2. According to Google Trends, the game is gaining traction and popularity. Two is nowhere near reaching the original version's height of popularity, but version 2 hit its all-time search volume peak this week. The root keyword "Farmville" is making a comeback, too. It is at a year high reading, which suggests Farmville 2 numbers for ZNGA could be a big positive during Tuesday's conference call.

We see similar trends for "Zynga Poker" as search queries have rebounded after falling off following July's high water mark. Searches for the keywords have been rising since early December and appear to be gaining steam.

Overall, in our opinion, Merrill's gutsy call is either a way to unload house stock before an ugly report or Post has found some relevant data that others haven't uncovered as of yet. Based on our Google Trend review, we think DAUs aren't as bad as projected, or indeed stabilizing as suggested by Post, then, maybe, Wall Street will find a reason to lift ZNGA shares post-eps.



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