Why Zynga Shares Zoomed Again
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Zynga popped 10% today after UBS upgraded the online social games company from neutral to buy.
So what: Along with the upgrade, analyst Eric Sheridan boosted his price target to $6 (from $4), representing about 34% worth of upside to yesterday's close. While contrarians might be turned off by Zynga's massive earnings-related pop last week, Sheridan thinks there's more room to run given the strong growth and margin enhancement tailwinds continuing to work in its favor.
Now what: According to UBS, Zynga is also a particularly timely opportunity.
"What leads us to upgrade now? 1) We believe that Q1 '14 & FY '14 guidance from the recent earnings call will turn out to be conservative due to stability at the core Zynga properties (monetization/usage); 2) NaturalMotion (while inorganic growth) is one of the leading iOS game developers & has seen tremendous success with its CSR Racing and Clumsy Ninja franchises ... and 3) Zynga EBITDA margins (& FCF generation) is likely to materially improve from trough levels (effect of 18 months of core cost cutting & the leverage from NaturalMotion bookings growth) as EBITDA margins return to the 20%+ level in 2015 and beyond," noted Sheridan.
With the stock now up about 100% from it 52-week lows and trading at a price-to-sales of four, however, I'd wait for a much wider margin of safety before betting on Zynga's still-uncertain growth prospects.
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The article Why Zynga Shares Zoomed Again originally appeared on Fool.com.
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