Zynga Inc (ZNGA)’s Transition Year: Is It Going in the Right Direction?

Conclusion

Zynga’s shares have delivered a strong performance this year on the back of shareholder optimism, rising by 48.5%, easily outperforming Facebook, Microsoft, and the S&P-500 ETF (SPY), which are up 0.3%, 20%, and 21%, respectively, in the corresponding period. Zynga called 2013 its “year of transition” and with the new CEO, cost cutting initiatives (including laying off of 18% workers), new mobile-focused product launches, and mid-core and online gambling games, 2013 is proving just that.

Despite rising by more than 48% this year, Zynga Inc (NASDAQ:ZNGA) is still not expensive. I haven’t used price-to-earnings or PEG ratios because Zynga is still not making profits, therefore those ratios would not represent an accurate picture. Instead, I have relied on price-to-sales (P/S) and enterprise-value-to-sales to illustrate that Zynga is still cheap and has considerable room for growth. The stock is currently trading at 2.18 times its annual sales, which is close to Electronics Arts’s number, as opposed to Facebook and Microsoft that are trading 11.4 times and 3.4 times their annual sales.

One advantage of using EV-to-sales ratio instead of the traditional price-to-earnings ratio is that the former incorporates the effects of cash and debt. Zynga has the lowest EV-to-sales ratio of the three firms shown in the table above, which illustrates that there could be more value for investors here than with other stocks.

Like any company in transition, Zynga has attracted its fair share of criticism (only some of which can be justified). For instance, the reduction in the role of Mark Pincus, despite retaining the role of Chairman and Chief Product Officer, is still a reduction and, therefore, should be viewed positively. Secondly, the hype surrounding the rise of King.com as Zynga’s biggest threat on Facebook is mostly hot air coming just before King.com’s IPO. Any in-depth analysis (such as here) would reveal Zynga Inc (NASDAQ:ZNGA)’s superiority over King.com. Investors should instead look at Zynga’s healthy balance sheet with $1.7 billion of cash reserves and no long-term debt. I believe that Zynga has a lot of potential and is moving in the right direction. In the coming months, it could easily outperform the market.