Not So Good News For Zynga Shareholders

Zynga Is Growing, But Growth Is Slowing 

Zynga NASDAQ: ZNGA reported a good quarter but not quite good enough to really get shares moving. The company is growing but growth appears to be slowing and beginning to be eclipsed by the new kid on the block. Roblox NYSE: RBLX, the current king of the metaverse, also reported earnings this week and not only beat the consensus figures but provided an above-consensus outlook supported by strong internal metrics. So, while Zynga’s results are good and point to continued growth the story may be played when it comes to the market, the stock, and the share price. 

Record Results Lift Zynga 

Zynga reported record results for the quarter and shares are moving higher but nothing compared to the 30% intraday gains posted by Roblox. The $705 million in revenue is up 40.2% over last year but this is the third quarter of sequential slowdown and we think sluggishness could worsen. The upshot is that sequential growth is strong and will likely remain in the double digits for the next quarter or two. After that, the post-acquisition comps will start to get harder and growth will slow drastically. 

The revenue was driven by a 21% increase in average mobile daily users compounded by an increase in dollars per user as well. The average number of monthly mobile users increased by a much stronger 120% and also point to continued growth in future quarters. The problem is that monthly user growth came in below expectations so, while the outlook is positive, there is another cloud hanging over it. As for earnings, the $0.04 loss is a penny better than expected.

Looking forward, the news is equally tepid. While the guidance has been raised the year has already peaked in terms of strength and 4th quarter expectations are weak. The new guidance is for revenue of $675 million in the 4th quarter which is better than the previous but still shy of the $6923.75 million expected by the analysts. 

Zynga Is Still A Buy-Rated Stock 

The analysts are still quite bullish on Zynga but the consensus price target is in decline. The Marketbeat.com consensus sentiment is a solid Buy with a price target that has fallen more than 300 basis points in the last 30 days. The most recent target reductions happened in the wake of the report, there are two, and both were lowered to $10. This assumes about 30% of upside for the stock and compares to the Marketbeat.com consensus price target of $11.80 which assumes 54% of upside is in store. In our view, Zynga is a lightly-valued consumer tech stock and could return to levels seen earlier this year. 

The Technical Outlook: Zynga Pops, Reversal In-Play 

Shares of Zynga popped on the Q3 news and broke the downtrend in share prices. While it looks like a reversal is in play there is a caveat. In many cases, a reversal in trend means a change from down to sideways and that is what it looks like we have here. While price popped, resistance is strong at the $7.75 level and may cap gains in the near to mid-term. If price action is able to move higher, the next target for resistance is near $8 and it is likely to be strong as well. Assuming price action continues to move sideways and trade within a range we see the bottom at $7 and the top possibly as high as $8.