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Aggressive Growth

Zynga (ZNGA - Snapshot Report) underwhelms with its first earnings report, but sees higher earnings estimates. The stock is a Zacks #2 Rank (Buy).

Company Description

Zynga Inc. develops, markets, and operates online social games on the Internet, social networking sites and mobile platforms. The company offers poker games, word games, and board games. The games are available on various platforms, including Facebook, Google+ and Yahoo. Zynga Inc. was founded in 2007 and is headquartered in San Francisco, California.

Limited Operating History

Zynga completed its initial public offering on December 15, 2011 and has reported earnings only one time. The first report beat the Zacks Consensus Estimate on the top and bottom lines.

Investors will key in on sales growth for young companies like Zynga. In its first public quarter, Zynga posted revenue of $311 million, $4 million ahead of the Zacks Consensus Estimate. The bottom line was even better, with a $0.02 outperformance of the Zacks Consensus Estimate of $0.03.

Gambling vs. Poker with Friends

Poker has been the mainstay for Zynga over the last few years and continues to be in the top three for bookings generation. There have been many calls for online poker to be legalized and taxed as governments look to open up new revenue streams, and ZNGA's base of 35 million players becomes a very attractive option for a potential casino partnership. Other games, like Words with Friends, have seen their use increase of late. Words with Friends also benefited from an Alec Baldwin meltdown before an American Airlines flight.

Estimates move higher following earnings

Following earnings earlier in the week, analysts have been increasing estimates for 2012 and 2013. The Zacks Consensus Estimate for 2012 was $0.19 in December 2011, and that ticked higher to $0.22 in January 2012 and now stands at $0.26.

2013 Estimates have moved from $0.29 in December 2011 to $0.30 in January 2012 and is currently at $0.32. As analysts get more familiar with the company, there is a good chance that estimates will continue to move higher.

Valuations

ZNGA's valuation is a mixed picture at present. It trades at a healthy premium to the industry average, carrying a trailing PE of 49X vs. 27x for the industry. On a forward basis, ZNGA trades at 46x compared to the 18x industry average. The company trades at a discount in terms of price to book and price to sales, so it’s not exactly cut and dry.

The Chart

The recent price action shows some pretty big swings of late. The recent earnings announcement saw a solid run up pre-earnings and sell off following earnings. The selloff was overdone, and as a result the stock traded higher by 4% the following day.

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Brian Bolan is an Aggressive Growth Stock Strategist for Zacks.com.

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