Zynga Climbs as SunTrust Starts Coverage With Buy Rating

Zynga rises after an analyst with SunTrust initiates coverage of the stock with a buy rating.
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Shares of Zynga (ZNGA) - Get Report climbed 2.9% to $6.45 Tuesday after an analyst with SunTrust initiated coverage of shares of the gaming company with a buy rating and a $7.50 share price target.

Analyst Matthew Thornton said in a note to investors that the San Francisco-based company, which owns such franchises as Empires & Puzzles, Merge Dragons, and Words With Friends, "provides pure-play exposure to the large and fast growing global mobile game market" with a growing and diversified game portfolio and "highly experienced management team and Board."

"In addition to a healthy existing portfolio, ZNGA has a strong pipeline (at least 7 games, including FarmVille, Harry Potter, Star Wars, Game of Thrones, and others) as well as a strong balance sheet (>$1.4b in cash) and acquisition track record (Small Giant, Gram Games) to augment organic growth with M&A in what is a highly fragmented market," Thornton said.

He said that he expects the company to see upside to consensus expectations over the next several years.

Nearly 100% of Zynga’s pro forma growth in the third quarter came from titles that were acquired under the current leadership team during the past two years, Thornton said, adding he believes mergers and acquisitions are one of Zynga's core competencies.

Thornton said he expects inorganic growth to remain a core piece of Zynga's strategy.

"Our own conversations with private mobile game publishers suggest to us that a sale to Zynga (under the current team) is generally viewed as a desirable outcome," he said.

He also said a potential risk facing the company could be rising user acquisition costs.