Photo: Matt Rosoff Business Insider
Finally some good news for Zynga.After better than expected earnings last night the company is getting an upgrade from Doug Anmuth at JP Morgan.
He’s labelling it “overweight” (which we think means “buy”) and he’s giving it a $14 price target up from $9.
Here are his four reasons for upgrading and one reason why people will think he’s nuts:
1)Strong metrics across users and payers. After a period of flattish or declining growth the past few quarters, all key metrics for Zynga either inflected or accelerated on a Q/Q basis in 1Q12—DAUs, MAUs, MUUs, and unique payers. MUUs, which we believe is the best overall proxy for Zynga’s penetration, increased from 153M to 182M Q/Q. DAUs were up 21% Q/Q and reached their highest level since 1Q10. Importantly, Draw Something accounted for only 1M of the 11.5M Q/Q increase in DAUs. We believe a significant part of the bear case has been the stagnant user growth in recent quarters. Zynga still needs to monetise this base better, but we believe the improving trends in 1Q are a strong step in that direction.
2) Zynga is gaining material traction in mobile. Mobile DAUs increased from 12M to 22M Q/Q—now 1/3 of total DAUs—and mobile represented the majority of bookings growth Y/Y and Q/Q. We know it’s early days in mobile, but we’re encouraged by newer games like Scramble With Friends and the high recurring pay levels of Zynga Poker on mobile. Draw Something, which hardly showed up in numbers given the late 1Q closing, should further add to mobile strength.
3) Draw Something perception overly negative. Zynga raised 2012 guidance to include Draw Something, suggesting a 3 quarter contribution of $50M-$75M. Based on the $180M purchase price, we think the ~3x bookings multiple makes sense for a game that has such strong viral and sharing characteristics. We recognise that Draw Something DAUs have declined since the acquisition, but we believe Zynga could stabilise the game through recent updates such as social sharing and in-game messaging, along with cross-platform marketing.
4)Valuation attractive at 9x 2013E EBITDA. Given 2011-2014ECAGRs of 24% for bookings and 41% for EBITDA, we believe current valuation at 9.3x 2013E EBITDA is attractive. Our target multiple of 15x is a bit below high-growth Internet names, which are in the mid-teens, and above digital gaming companies in the low- mid teens.
Where we’ll get push-back: 1) There are 4 lock-up expirations between now and August 16 including one for 115M shares (14% of shares out) on May 1; 2) ABPU declined 12% Q/Q; 3) game lifespans are generally shortening.