The Street this afternoon continues to debate the merits of online games purveyor Zynga (ZNGA), with Wedbush Securities’s Michael Pachter writing that the recent sell-off in the shares is “misplaced,” and that new game titles an better monetization will overcome recent user declines, and Morgan Stanley’s Scott Devitt writing that traffic metrics are actually encouraging. Even Barclays Capital’s Mark May , who has an Equal Weight rating on the shares, writes that he’s less negative than previously.
The stock had been under quite a bit of pressure last week, amidst concerns over slowing user growth, summed up by Cowen & Co.’s Doug Creutz last Tuesday. But the stock was defended by a slew of analysts, culminating with a report from Goldman Sachs‘s Heath Terry on Friday.
Pachter, who has an Outperform rating on the stock, and a $17 price target, thinks shares “have hit a bottom,” and that investors misunderstand the connection between the number of “monthly active users” (MAU) and the consequent revenue growth:
Zynga shares have been negatively impacted by MAU declines as investors become concerned that fewer users result in lower total revenue. We disagree, and believe that the majority of gamers who discontinue playing Zynga titles are likely to be non-payers, with payers spending more as they make a greater investment of time in each game.
Moreover, Pachter sees the company being helped by “a slew of new releases” starting this month, with�”Unleashed” event that the company is holding on the 26th.� Those releases will includ “Bubble Safari,” “Empires &
Allies,” “Adventure World,” “CastleVille,” “Draw Something,” “Hidden Chronicles,” “Zynga Bingo,” and “Zynga Slingo.”
Devitt, who has an Overweight rating on the shares, is also encouraged by the prospect of new titles. But he argues the traffic stats are actually fairly encouraging, which he attributes to Zynga having added links to Zynga.com to the “zBar,” a part of the user interface that appears in the company’s games on Facebook (FB):
Traffic rise suggests Zynga.com is gaining steam: comScore released its worldwide traffic data for May-12 this morning, and monthly unique visitors to Zynga.com grew +115% month-over-month to 20.1MM, echoing the strong uptick in US growth reported by comScore earlier in the month (+105% m/m to 6.6MM users). Worldwide visits to Zynga.com (+134% m/m) and minutes spent on the site (+103% m/m) also grew proportionally to users. Users are still slightly below the all-time highs in early C2011 when Zynga.com was an informational website.� comScore�s data also suggests that DAUs / MAUs reported by AppData for Zynga.com may be too low. AppData reported peaks of 4.9MM MAUs / 910K DAUs on 5/31/12 (after slowly rising throughout the month), compared to monthly/daily unique users of 20.1MM / 1.7MM reported by comScore for May (which should be lower as they are averages). A visit to Zynga.com during the day usually shows ~1.5MM concurrent users, which leads us to believe that AppData (and similar services) may only be counting a portion of Zynga.com users.
Barclays’s May offers a mixed message. On the one hand, with the stock down 50% from the IPO through Friday’s close, “we�ve become less negative and would recommend that bears reconsider their positions.”
However, he sees several risks to bear in mind:
1) we continue to see risk to CY12 & CY13 consensus estimates; 2) we believe the mix shift to mobile is a net negative to monetization that is not well understood; 3) the OMGPOP business could already be trending below expectations; 4) there is an additional 200mn shares coming off lock-up in July & August; and 5) the launch of an app store by Zynga�s largest partner could increase competition.
Zynga shares today are up 19 cents, or 3.4%, at $5.94.
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