Companies generally don’t beat the market by sticking to the well-beaten path. Instead of playing it safe, the strong performers bet on themselves by developing new growth drivers or acquiring assets that synergize well with their core operations.
Zynga (NASDAQ:ZNGA) has been following the latter strategy and outperforming as a result. Let’s dig deeper into why this video game maker looks poised to turn this growth strategy into a real bull run.
First-quarter earnings were a slam dunk
One strategy for video game producers is to risk money on creating games that have the potential for great success but could just as readily flop. Zynga has found an alternative to this where it acquires already established studios and incorporates their successful video game assets and development teams into its operations. This strategy can create synergies and help the company quickly pivot to new market opportunities.
One such opportunity is hypercasual games. These are simple, user-friendly mobile apps that are typically monetized through advertising instead of software sales. Zynga considers this trend to be a transformational growth opportunity and has been on the hunt for companies that can help it expand in this area. In 2020, the company closed a $180 million acquisition of Istanbul-based Rollic Games — a leader in the hypercasual segment. The combination is already boosting Zynga’s operational results.
First-quarter revenue surged 68% year over year to $680 million (beating guidance by $45 million). And according to CEO Frank Gibeau, Rollic has “seamlessly integrated into Zynga’s family of studios.” Management hasn’t provided a breakdown of revenue contribution by studio. But advertising revenue (driven by Rollic’s hypercasual games) soared 108% to $123 million in the first quarter, representing 18% of revenue — up from 15% in the prior-year period.
Zynga’s bottom line is improving
An acquisition-based growth strategy is not without its challenges. In Zynga’s case, contingent considerations (performance-based payments for acquired businesses) put pressure on cash flow. These outflows totaled $23.7 million in the first quarter and could increase based on the performance of Zynga’s acquired assets.
Nevertheless, Zynga reported a first-quarter adjusted EBITDA of $123 million, which is up to $55 million from the prior-year period. Its GAAP net losses narrowed from negative $104 million to negative $23 million. Management expects the positive momentum to continue — guiding for full-year 2021 revenue to grow 37% to $2.7 billion, with adjusted EBITDA surging by 69% to $450 million.
Zynga also plans to continue its acquisition-powered growth strategy, announcing the purchase of advertising and monetization platform Chartboost in May. This new business can help the company execute its pivot to ad-based hypercasual games. And with $1.36 billion in cash and investments on its balance sheet, management has a war chest to pursue more opportunities should they become available.
Could Zynga be an acquisition target?
With its rapid growth rate and reasonable valuation of just five times 12-month sales (market cap of $11.3 billion), Zynga is an attractively valued company. Mergers and acquisitions are common in the mobile game industry — close rival Glu Mobile was bought by Electronic Arts in April. And while there is no evidence Zynga is trying to be acquired by a larger company, investors should consider buying Zynga before someone else does.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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