But analyst Doug Anmuth’s endorsement Friday morning didn’t stop the stock from sinking more than 6% to US$8.85 less than half an hour into the trading day after an initial climb in pre-market trade.
Shares of the social gaming company, which stumbled out of the gate after its December initial public offering, have been slipping in price since early March.
Zynga, well known for its “Farmville” game for Facebook, reported better-than-expected first-quarter numbers on Thursday, as revenue of US$321-million beat the US$317.25-million predicted by analysts.
However, its stock still slumped in post-market trading Thursday after it reported that it expects much of its growth to come from people who play its games on mobile devices, which don’t typically generate as much revenue as web-based social games.
But in a note to clients Friday morning, Mr. Anmuth took a more bullish stance on Zynga’s expected strength in the mobile space.
“We know it’s early days in mobile, but we’re encouraged by newer games like ‘Scramble With Friends” and the high recurring pay levels of ‘Zynga Poker’ on mobile,” he said.
In late March Zynga paid US$180-million for OMGPOP, a New York-based company that makes “Draw Something,” a game that became an overnight sensation earlier this year.
The acquisition came late in Zynga’s quarter, Mr. Anmuth noted, so it contributed to just one million to the company’s 11.5 million quarter over quarter increase in daily average users (DAUs).
“Draw Something” should play a bigger role going forward, he said, and the company expects it to contribute from US$50-million to US$75-million over three quarters.
The company’s current valuation of 9.3 times 2013 estimated earnings is attractive, he added.
Some risks to the outlook, he said, include player attrition based on fickle consumer interests and ramped up competition in the social gaming sphere from companies like Electronic Arts Inc. and Walt Disney Co. and private companies like Crowdstar and Vostu.
“Zynga’s model is fundamentally hit-driven so it is critical that the company is able to launch new franchise titles going forward,” Mr. Anmuth added. “If it is unable to do this, our rating and price target could be at risk.”
His upgrade came less than two months after he cut his rating on the stock to neutral from overweight on March 5. He maintained a US$14.00 nine-month price target on Zynga stock.
Bank of America also upgraded its rating on the stock Friday, boosting it to neutral from underperform based on the view that better growth in mobile makes the risk of an earnings miss less likely going forward.
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