Why Zynga (ZNGA) is Still a Sell

NEW YORK (TheStreet) -- TheStreet Ratings team reiterated Zynga (ZNGA) as a "sell" on Friday with a ratings score of D+.

By early afternoon, the internet gaming stock had plunged 5.2% to $3.38, capping off two weeks of losses after investment firm Sterne Agee revised its fourth-quarter and first-quarter estimates last week. 

The firm noted that first-quarter guidance is "likely to disappoint," and that estimates for 2014 could prove too high. Sterne Agee has a "neutral" rating on Zynga.

"We are adjusting our Q4 Bookings/Adjusted EBITDA estimates to $130M/($18.1M) from $137M/($13.6M)," analysts wrote in a note. "We are also reducing our Q1 Bookings/Adjusted EBITDA Estimates to $116M/($17.2M) from $137M/($3.5M). Previously we had modeled Q4 to represent the "bottom" in terms of bookings declines, but now we are modeling Q1 to represent the bottom. Our full-year estimates for 2014 are unchanged."

The San Francisco-based business is due to release fourth-quarter results on Feb. 6. Analysts surveyed by Thomson Reuters anticipate a net loss of 4 cents a share on $138.42 million in revenue. 

Two weeks ago, Zynga announced plans to shut down YoVille, its longest-running game, on March 31. Zynga is offering "special packages" to YoVille users who sign up for other Zynga games. 

TheStreet Ratings Team has this to say about their recommendation:

"We rate ZYNGA INC (ZNGA) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has significantly decreased to -$4.86 million or 116.11% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Software industry and the overall market, ZYNGA INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The revenue fell significantly faster than the industry average of 3.1%. Since the same quarter one year prior, revenues fell by 36.0%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • The gross profit margin for ZYNGA INC is currently very high, coming in at 87.65%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -0.03% is in-line with the industry average.
  • ZNGA has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 3.77, which clearly demonstrates the ability to cover short-term cash needs.

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