How Can Underperform on Zynga Imply 28% Upside?

Zynga Inc. (NASDAQ: ZNGA) should by all traditional thought processes be trading lower today. At least that is the thought of investors as the only real news out today is that Credit Suisse started coverage on the social gaming player with an Underperform rating. That is the same thing as a Sell rating elsewhere.

No one wants to own shares that underperform. Or do they? If you look at the implied price target of $3.00 listed by Credit Suisse and take the $2.35 closing price of Wednesday, this Sell or Underperform rating actually implies upside of almost 28%.

Credit Suisse talked about a continual decay of old games and questions whether the cross-selling is impaired. Still, with $1.34 per share in cash and with cost cuts the outlook is that of a floor. The firm noted, "Our $3 price target is based on DCF, which uses a 14% WACC and 3% terminal growth. Our long-term (2013-2018) growth projections for bookings, adjusted EBITDA, and adjusted EPS are 3%, 9%, and 3%, respectively."

We would also note that the Underperform mystery upside here is because the overall ratings from Credit Suisse recently underwent some changes. It no longer is absolute performance, as analyst outlooks from the firm also take into consideration the expected performance of competitors and peers.

Very few companies would be so lucky to get ratings of Underperform and still have an implied upside of close to 30%. Zynga shares are actually up 1.7% at $2.39, and the post-IPO trading range is $2.21 to $15.91. What is amazing is that the market cap of this "social gaming" company is still about $1.8 billion.