With its IPO priced at $10 per share back in December of 2011, Zynga (NASDAQ:ZNGA) has fallen more than 75% since. Inconsistent revenues, negative margins, and a declining user base have dragged the company down to alarming lows. However, Zynga still carries a very strong balance sheet and is trading only slightly above its book value, which consists of a high level of cash. With a new CEO and a cheap valuation, now is a good time to keep an eye on the Zynga stock.
Source: Zynga Stock Price Chart by amigobulls.com
Strong Balance Sheet
Zynga's liquidity is not quite as bad as you would expect for a company that has been performing at a negative operating margin. With $742 million in cash, Zynga has a very strong cash ratio of 3.1. This is still enough cash to get them by for a while. In 2015, Zynga had an operating loss of $146 million, which is a 40% reduction from the year prior. So, with $742 million in cash and low liabilities, and also without any long-term debt, Zynga's balance sheet is well positioned against its consistent net losses.
Valuation
At a $2 billion market cap, Zynga is trading at a price-to-book ratio of 1.1. That's very attractive considering nearly a billion dollars of their book value is comprised of cash. With large cash and no debt, Zynga would be a great acquisition target. And with a clean balance sheet like they have, it is not hard to see the value in Zynga. At 2.7X sales, they are trading below the industry average of 4.2 but rightfully so. Zynga is underperforming against the industry in margins and growth, and therefore should be trading at a discounted sales ratio. However, it does not negate their book value, which carries no debt and substantial cash, which means the company is well positioned for any future funding or capital needs.
The Problem
Zynga tumbled due to poor performance. Revenue for 2015 was $765 million, down from $1.28 billion in 2012, and has been accompanied by a decline in its user base. The company has been unable to post positive operating income and had an EPS of – $0.13. Although Zynga has the cash to back up its valuation, they don't have a catalyst to drive their value higher. Too much inconsistency across its top and bottom line drove Zynga stock to all-time lows.Now the challenge is in finding a catalyst to drive this stock back up to a more reasonable trading price.
