Can Zynga Already Be a Value Buy?

Amid a broadly lower day in the market, social game maker Zynga (NAS: ZNGA) is bucking the trend and has seen its shares jump by as much as 9.7% today on the heels of some bullish analyst sentiments.

JMP Securities has initiated coverage on the company with a "market outperform" rating, accompanied by a $4.50 price target. This deserves some additional context though. While that target represents over 50% upside from yesterday's closing price of under $3 per share, and certainly a 50% gain would outperform the market, this seems to be a value-based rating since shares had lost about 70% of their value since the company went public at $10 last December.

It would seem that investors are now thinking Zynga looks awfully cheap, as its market cap was just $2.25 billion at yesterday's close. When you consider that Zynga has about $1.64 billion in cash and investments on the books, 73% of its market cap before today's rally, the case for Zynga being cheap is clear. Even if you factor in the $100 million in long-term debt and bring its net cash position down to $1.54 billion, the market's not giving Zynga's future much credit. At $4.50 per share, Zynga would be valued at $3.4 billion.

It's worth pointing out that of Zynga's cash position, just under $1 billion of it was raised from the IPO itself, albeit at a much loftier $10 per share, so most of that money already belonged to public shareholders in the first place. Prior to the IPO, Zynga was sitting on $926.3 million in cash and investments. Zynga would then proceed to blow $183.1 million in cash on OMGPOP in March.

"Blow" is an apt description of the purchase, since by Zynga's own admission OMGPOP is not performing as well as expected. Throw in the fact that Electronic Arts (NAS: EA) is suing the company and it still relies too heavily on Facebook (NAS: FB) , although this is improving, and dirt-cheap valuation really is the only compelling reason to be even remotely bullish.

Still, as far as Zynga's long-term actual business -- you know, that part investors should care most about -- I still see nothing but dubious ethics, a flawed business model, an overbearing CEO, and a lack of internal innovation.

It's hard to consider a freshly public growth stock a value buy, especially one whose fundamentals are deteriorating. Sorry, but this trade would prove to be a value trap, not a value buy.

I'm pretty unabashed with my bearishness on Zynga, but for an even more detailed look at why I think Zynga has more downside in store, grab a copy of this premium research report, where I take an in-depth look at the company's numbers, including how small of a portion of its user base actually pay a dime for its games. Sign up now and get free quarterly updates.

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