Zynga Stock Would Look Strong in Any Other Market

Alex Sirois

February 15, 2022 4 min read

ZNGA
TTWO

Mobile game firm Zynga (NASDAQ:ZNGA) stock is in a better place than it was not long ago. The future of the firm is now tied to Take-Two Interactive Software (NASDAQ:TTWO) after the companies combined back in January.

The Big Dogs Threaten to Make Zynga Stock a Tad Too Exciting

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Given Zynga’s recent earnings report, there is reason to believe it could return to price levels seen during the pandemic. Let’s start there.

Earnings for ZNGA Stock

Zynga announced fourth-quarter (Q4) earnings on Feb. 9. There was a lot to like from those earnings. Both Zynga’s revenue and bookings numbers were ahead of guidance. Revenues reached $695 million in Q4, $20 million better than the $675 million in revenue that was anticipated. Likewise, bookings reached $727 million, substantially ahead of the $715 million the market was expecting.

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However, the news wasn’t all positive. Wall Street was looking for Zynga to report a $60 million net loss during the quarter. So, the $67 million net loss in the books likely served to tamp down some of the excitement those strong earnings and bookings figures created.

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Indeed, ZNGA stock hasn’t shown much reaction to the news in terms of price movement in the days following the announcement.

One reason for that may be that Zynga is a growth and tech stock, albeit an improving one, at a bad time.

Performance and Timing

Zynga’s 2021 was arguably quite strong. Revenues grew by 42%, reaching $2.8 billion. That is what investors expect out of growth stocks. So, it wasn’t much of a surprise. Importantly, the firm also significantly reduced its losses.

In 2020, Zynga recorded a $429 million net loss. In 2021, that loss shrank to $104 million. I would argue that is a strong performance. The problem is that the timing is bad.

Inflation numbers were terrible in January. Inflation reached 7.5% in the month. That means the cost of living increased by levels which haven’t been seen since February of 1982. That suggests that the U.S. Federal Reserve (Fed) is going to become increasingly aggressive in its efforts to cool inflation. The result will likely come in the form of interest rate hikes at every policy meeting until the fall season.

In other words, the Fed will be tightening the fiscal policy and putting an end to cheap lending. As January showed on the heels of December inflation concerns, that is a terrible environment for tech stocks. In short, tight fiscal policy equates to investors moving their capital into safer, value oriented equities. Zynga isn’t that, given that it still runs a significant, albeit markedly improved net loss.

The point I’m making here is that ZNGA stock probably would have shot up drastically if these results were released two months earlier.

Take-Two and Zynga

Much like the positive numbers in the latest earnings report, the Take-Two deal is also a positive for the company. Take-Two acquired all of the outstanding shares of Zynga back on Jan. 10. Take-Two purchased those shares at a value of $9.86 per share. That was 64% higher than Zynga’s closing price of $6 on Jan. 7.

The good news is that Zynga has maintained that price level even as inflation figures spiral. To me, that suggests that the market believes in Take-Two’s valuation of Zynga.

If it didn’t, ZNGA stock would have declined back to $6 by now. It also implies that the market still believes that the “$100 million of annual cost synergies within the first two years post-closing and at least $500 million of annual Net Bookings opportunities over time” will still occur.

What to do With ZNGA Stock

Zynga looks like an improving company worth considering. It is just that the timing is bad. In times of looser monetary policy it would certainly be a buy. But the fact is that we are not in a period of quantitative easing by any means.

Investors could certainly buy-and-hold in the hope that inflation slows. But that is a big gamble right now. It looks like waiting for inflation to slow is going to be a long wait. That means tech stocks have entered a holding period of sorts.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.