We should go long on Zynga (ZNGA) before its October 30 earnings report. Zynga might surprise us all and report a beat on Q3 EPS and revenue estimates. We suspect that robust in-game mobile advertising and strong games portfolio will help Zynga beat the consensus EPS estimate ($0.05) and average revenue estimate of $339.05 million.
Our optimism over Zynga’s Q3 performance is because The gacha-type (or gambling-like) feature of getting the best items/heroes in Zynga’s Empires & Puzzles is a reliable growth driver. We don’t even have to discuss the sales performance of other Zynga games. The continuing success of Empires & Puzzles is already sufficient reason to go long or buy more ZNGA. This game contributed 27% to Q2’s online game bookings of $310 million.
Based on the most recent report of Sensor Tower, the September net global sales (30% cut of app store owners was already deducted) of Empires & Puzzles were $14 million from Android and $9 million from iOS. These figures are notably higher than August 2019 net sales of $12 million (Android) and $7 million (iOS). Empires & Puzzles 2018 iOS net revenue was only $6 million. The growing monthly net sales of Empires & Puzzles is in spite of Zynga’s soft launch of the derivative game Puzzle Combat.
Why Empires & Puzzles Is Key To Valuing Zynga
Empires & Puzzles is Zynga’s strongest game right now. It should please investors that this game’s lifetime revenue is already $507 million at just 41 million downloads. Compare this to Tencent’s (OTCPK:TCEHY) PUBG Mobile which has a lifetime revenue of $1 billion on 400 million downloads.
ZNGA is a buy because it now has a game that has a lifetime average revenue per download of $12.36. PUBG Mobile’s lifetime average revenue per download is only $2.5 ($1 billion divided by 400 million). We can safely say Empires & Puzzles is more efficient in monetizing than PUBG Mobile.
Based on the chart below, Zynga’s December 2018 gambit in buying Empires & Puzzles is paying off profitably. The three games below are all acquired/bought assets. Zynga did not make/develop them. Inorganic growth through acquisitions was necessary because Zynga was unable to develop hit games on its own.
Yes, Empires & Puzzles is not a popular game because it has less than 50 million lifetime downloads. However, this game certainly has captured long-term spenders. The $12.36 average revenue per download of Empires & Puzzles makes it an excellent forever franchise for Zynga.
The strong revenue from Empires & Allies is even more impressive when you consider that it still doesn’t have a China-centric version. May I suggest that Zynga recruit Tencent to develop/publish a Chinese version of Empires & Puzzles.
Half of China (or 691 million citizens) reportedly plays mobile games. The estimated 2019 video games revenue in China is $36.5 billion. My fearless forecast is that a Chinese and China-patriotic (no blood or gore on video games) of Empires & Puzzles can feasibly net $10 million/month from iOS/Android players. If we deduct the 50% cut (my subjective guesstimate) of the China publisher (maybe Tencent or whoever it will be), Zynga can still use an extra $5 million in monthly game revenue.
Zynga’s Q2 revenue was only $302 million. Its trailing monthly revenue is therefore just around $100 million. Zynga can benefit from new $5 million/month potential revenue from releasing a Chinese version of Empires & Puzzles. The long-term prosperity of Zynga is better when it can penetrate the huge gaming market of China.
Brawling it out in China can help Zynga get a bigger slice of the $152.1 billion global video games industry. Zynga can focus on mobile games with winning formulas like Empires & Puzzles, CSR Racing 2, and Merge Dragons! The $68.5 billion revenue from mobile games and $13.6 billion from tablets are compelling reasons for Zynga to release copycat versions of its current hit games.
As per Sensor Tower’s data, Merge Dragons! had global September net sales of $16 million. CSR Racing 2 was weaker, it only netted $4 million from Android and $2 million from iOS players. Zynga needs more games that generate $10 million or more in monthly net sales. It will save Zynga development and marketing money to make copycat or same-genre versions of its hit games.
Zynga Also Makes Money from Non-Spending Gamers
Let us not forget that Zynga also delivers mobile advertising on its games like Empires & Puzzles. Compelling non-spending players at Empires & Allies to click and watch 15-to-30 second incentivized or rewarded video ads strengthen Zynga’s $66 million/quarter advertising business.
You should buy and hold Zynga for a long time. This company also makes money from non-paying mobile gamers through incentivized mobile ads. Many players who cannot afford to spend $10 or $20 per month on in-app purchases will just patiently watch 20 or 30 incentivized video ads per day so they can get in-game currencies. They can then use these game currencies (gained from watching video ads) to gamble on getting the best heroes/items/pets in their favored mobile games.
Going forward, Zynga is augmenting its video games revenue through its own advertising service platform. The more hit games Zynga has, the more players it can attract. Few of these players will be repeat in-app purchasers. However, many of them will be repeat watchers of rewarded video ads on mobile.
We are attracted to Zynga because it is a successful video games company that also emerged as a savvy mobile advertising service provider. Zynga knows that optimizing monetization of mobile games also includes making money out of non-spending players. The easiest way to make money from non-spending mobile gamers is to offer attractive rewards if they click and watch video ads.
It is our fearless forecast that ZNGA might see higher valuation after its Q3 2019 earnings report. Our Q3 EPS guesstimate is $0.06, and revenue of $360 million. The management also needs to offer optimistic Q4 guidance. A positive Q4 projection is always desirable after a Q3 beat.
Investing and holding on to ZNGA is quite safe. Even after the December 2018 $560 million purchase of Small Giant Games (maker of Empires & Allies) Zynga still has a decent Q2 balance sheet with over $828.6 million in cash & equivalents. This figure is still far higher than Zynga’s long-term debt of $558.4 million.
Zynga still has enough extra cash to buy another company with a hit mobile game. Zynga doesn’t need to develop new games to actually grow its business. Zynga can just buy other people’s hit games. The only thing Zynga needs to spend serious money on is over live operations and new updates. Regular updates/new content and live events/promo are necessary to keep players spending and actively playing.
Hit games are influential in the long-term valuation of video games companies like Zynga. Zynga certainly has a hit game in Empires & Puzzles. This game is more than 2 years old and yet it still has growing monthly net sales. We expect Empires & Puzzles to hit $1 billion in lifetime revenue within the next fifteen months. We also expect this game’s average revenue per download to remain at $12 or higher.
Disclosure: I am/we are long ZNGA, TCEHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.