With so many people spending time at home this year, it makes sense that video games are increasing in popularity. The industry was seeing accelerated growth before the pandemic thanks to the widespread adoption of mobile technology and the rise of social media. Now, many of the companies that offer video games are seeing record numbers thanks to social distancing and work-from-home measures. This is an industry that still has a lot of upside, which is why investors might want to check out stocks that offer video game products and services at this time.
Companies that offer mobile gaming services are an interesting prospect because we know that most people today own smartphones. In fact, as of 2019, a Pew Research survey found that 81% of Americans owned smartphones. That number has very likely increased in 2020, which means that there is a huge market for mobile gaming. Zynga (NASDAQ:ZNGA) is a San Francisco-based company that provides social video game products that are played on mobile phones and various social media platforms. The stock has been performing well this year and could be a smart buy at this time. Let’s take a deeper look at Zynga’s business model and why it should be on investor’s radar going forward.
Connecting the World Through Games
Zynga is a company with an interesting story. It found early success thanks to its web-browser based games like FarmVille, Words with Friends, and Zynga Poker that were marketed on Facebook with viral messaging. However, the company ran into major difficulties as gaming quickly moved away from web-browsers and onto mobile phones and tablets. The stock plunged to the $2 range back in 2012 and was stuck around that price for years. Things changed in 2016 when the company began a major transformational shift and hired Frank Gibeau, a former executive of Electronic Arts (NASDAQ:EA). Gibeau and Zynga’s management team began focusing on monetizing a strong portfolio of hit mobile games and making smart acquisitions.
Now, Zynga is one of the hottest mobile gaming companies with millions of loyal users. It’s a great example of a business that experienced a remarkable turnaround after a massive strategy shift. Zynga continues to spend heavily on new acquisitions including the recent purchase of Rollic, a “hyper-casual” videogame developer. Hyper-casual games are a rapidly growing type of video game that is easy for new users to pick up and start playing without a steep learning curve. Eight of Rollic’s games have been the #1 or #2 top free downloaded games in the U.S. app store. These are the types of moves that investors love to see and help to confirm that Zynga is committed to its mission statement of “connecting the world through games”.
Strong Earnings Confirm Growth
We mentioned earlier that gaming companies are benefitting from several trends at this time, and Zynga’s Q2 earnings release back in August provides confirmation. Zynga saw its highest quarterly revenue and bookings in the company’s history along with its best quarterly operating cash flow in over 8 years. Revenue increased by 47% year-over-year to $452 million largely driven by record online game revenue of $388 million, a year-over-year increase of 61%. This tells us that Zynga gamers are consistently spending on things like in-app purchases.
After a truly impressive quarter for Zynga, the company raised its full-year revenue and bookings guidance, which is a sign of strength during a period of uncertainty for many businesses. Zynga also completed the acquisition of Peak Games during Q2 for $1.8 billion, which adds even more successful mobile game franchises to the company’s portfolio. Although Zynga is a smaller company, it continues to make smart acquisitions and report strong earnings growth. These are great qualities to look for in a long-term investment.
Zynga stock looks like a solid buy for investors that are interested in exposure to the mobile gaming market. The stock is up over 50% year-to-date and currently trading at $9.58 a share at the time of this writing, which makes it an affordable stock for investors that are excited about the growth that the company continues to experience. Mobile gaming is here to stay and people love the social component to Zynga’s portfolio of games, which are keeping people connected in a unique way during the pandemic. Keep an eye on this stock in the coming weeks as the company will report its Q3 earnings on November 4th.
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