Zynga Gamble a Worthy Bet

NEW YORK (TheStreet) -- After Zynga's (ZNGA) robust earnings report, the online game maker shares catapulted higher. I think the stock is at the very beginning of a journey upward. I first posted my bull thesis in Real Money Pro in an update including what price to buy at and a one-year price target of $10 or more.

The analysts following the company are holding the window of opportunity open for you. TheStreet's Chris Ciaccia reported some comments from several analysts in his Jan. 31 piece on Zynga's surge. According to Ciaccia, BMO Capital Markets rated the company as a hold with a price target of $3.50, underperformance predicted from Credit Suisse with a $4 price target, and Jefferies was somewhat neutral with a market perform $4 price target.

Not listed in the article is my favorite, by Sterne Agee almost a month ago, that sent shares racing lower on Jan. 16. The analyst can be forgiven for incorrectly estimating the fourth-quarter results. Ten days later, Zynga made every squeezed short seller holding wish they covered into the fall.

While all analysts use the best metrics available and calculate earnings estimates, Sterne Agee and the rest fail to understand that next quarter and comparative bookings overall are not the way to value Zynga.

The company is more accurately valued as an online real-money poker and gambling site. Instead of comparing Zynga to Electronic Arts (EA), Activision Blizzard (ATVI) and others in the multimedia and graphics software industry, investors should begin comparing and analyzing Caesars Acquisition Company (CACQ), Caesars (CZR) and International Game Technology (IGT).

Granted, most of the revenue as of the last earnings release is generated from non-gambling games, with most of these players arriving through Facebook (FB), but there is no reason to think it can't morphing from a caterpillar of miserable performance into a gorgeous profitable butterfly. In the span of two short quarters, online gambling already matured into about 25% of Zynga's game revenue.

UBS (UBS) recently upgraded Zynga to a buy with a $6 price target. While I give UBS credit for the upgrade, the motivation appears to miss the mark. Stabilization of core operations, new management and cost reduction measures are highly encouraging, but where are references to the incredible growth and earnings potential?

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