Zynga Shows Signs of a Turnaround to Play for Outsized Gains

NEW YORK (TheStreet) -- There's nothing like a turnaround story to play for potentially outsized capital gains, and that could be happening with Internet games maker Zynga . Traders who've been around long enough to feel the elation of the well-executed bargain trade have come to realize turnaround stories offer one of the best opportunities to take the other side of a grand capitulation. Zynga ranks among those top high-profile opportunities. Only three months after its reasonably successful December 2011 initial public offering it has been downhill for ZNGA. Investors were skittish about ZNGA's lack of depth in its bullpen of games and the company's reliance upon the third-party success of the Facebook platform. At its peak price in $15.91 in March 2012, ZNGA plummeted nearly 87% to $2.09 per share by November. 2012. Shares currently trade at $3.32, down over 12% for the year to date. Since November 2012, however, shrewd traders of this stock sensed too much blood in the street and bought a maligned company that still had $1.3 billion of liquid assets on its books, against a combined short and long-term liabilities of nearly half that much. Those bold enough to realize ZNGA had plenty of time to correct a bad situation also believed a $2 share was worth a wait-and-see, especially when ZNGA's liquid assets amounted to approximately $1.50 per share. The falling stock price provided an opportunity to reward the bold trader with a potential 181% return by March 2014. ZNGA steadily rose to as high as $5.89 from bargain hunting, short covering and, later, on optimism in July 2013 of a new experienced management team forming at the company, which is now headed by a former Microsoft executive responsible for successful sequels to the Xbox, Don Mattrick. Mattrick built his team for the turnaround including Clive Downie, COO and Alex Garden, President of Zynga Studios. Now this team needs to show investors some meaningful earnings results, which Mattrick said won't be truly be seen until 2015. Another improved quarter like the first-quarter 2014 results will go a long way to reassuring investors that ZNGA is headed for some nifty capital gains. Though the company reported an adjusted Ebitda of $14 million for the first quarter, the company lost $61 million and shed $343 million from its cash/cash equivalent account, with the latter due to write downs. However, by improvement, we suggest investors should watch the "Audience Metrics," "Monetization" of that audience, and "Bookings," to glean whether evidence of a ZNGA turnaround truly exists. ZNGA management considers these three metrics as "key," according to SEC documents. And so do we. Chart Notes: "DAUs" mean daily active users of our games, "MAUs" mean monthly active users of our games, "MUUs" mean monthly unique users of our games, "ABPU" means average daily bookings per average DAU and "MUPs" mean monthly unique payers of our games. Unless otherwise indicated, these metrics are based on internally-derived measurements across all platforms on which our games are played. Source: ZNGA Form 10-Q Quarterly Report - Q1 2014 Source: ZNGA Form 10-Q Quarterly Report - Q1 2014 Source: ZNGA Form 10-Q Quarterly Report - Q1 2014 From the charts, above, the MAU statistic from the "Audience Metrics" chart indicates a rise of approximately 10%, but also only show a 7.5% rise in MUU. This appears to imply that, on average, the games have become more addictive to more users. To get a better look at the trend in "addictiveness" of the games, the table, below, illustrates that ZNGA is moving in the right direction - back to user addictiveness levels of a year ago. By dividing MUU by MAU (MUU/MAU), investors can gauge whether the trend in addictiveness is rising or falling. According to the first-quarter results, ZNGA may have turned the corner. As a caveat to the analysis, investors won't know until later in the year what impact NaturalMotion will have on the MUU and MAU statistics. It will also be curious to see whether a breakdown between NaturalMotion and the rest of ZNGA will be provided in the second-quarter presentation. QUARTER - MUU/MAU Q1'13 - 59.3% Q2'13 - 65.8% Q3'13 - 72.9% Q4'13 - 71.4% Q1'14 - 69.9% With ABPU also rising, the momentum is clearly present in higher levels of bookings. According to Zynga's fiscal 2014 full-year guidance, the company expects to book between $770 million and $810 million. That calculates to bookings expected to average approximately 210M for the remaining three quarters fo fiscal 2014. With a tremendous rise of 28.6% in ABPUs year-over-year, ZNGA needs to only achieve approximately 180M MAUs to reach the revenue level of the first quarter of 2013. At the present rate of sequential increase of 10% in MAUs, ZNGA will fall short of 180M MAUs by the fourth quarter, so the expectation is for a faster MAU rate increase for the second quarter. Whether the ABPU continues to rise will determine if a lower rate of increase of MAUs will be necessary to achieve 180 million. Overall, a better analysis of these metrics will become more clear when NaturalMotion statistics are factored into the data. In addition to watching gross margin and operating margin, it is the above-mentioned analysis we feel investors should watch closely to access whether or not Zynga is on the comeback trail. At the time of publication the author was long ZNGA. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. >>Read more: You Can Now Watch the World Cup Through Google Chromecast

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