Zynga (ZNGA) Rallies Ahead of King Digital IPO

NEW YORK (TheStreet) -- Social games developer Zynga (ZNGA) is being pulled higher on Tuesday, a side effect of excitement over King Digital's public offering this week.

King Digital, best known for its highly-addictive mobile game app 'Candy Crush Saga,' could be priced Tuesday night with the stock making its market debut on the New York Stock Exchange on Wednesday.

King Digital is offering 15.5 million shares at between $21 and $24 a share. If it floats at the upper end of that range, its valuation of $7.6 billion would be nearly double Zynga's $4.11 billion market capitalization.

By midday, shares had climbed 2.9% to $4.84. Trading volume of 26.3 million was close to exceeding its three-month daily average of 33.9 million.

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TheStreet Ratings team rates ZYNGA INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ZYNGA INC (ZNGA) a SELL. This is driven by multiple 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 $7.73 million or 60.90% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. 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 gross profit margin for ZYNGA INC is currently very high, coming in at 84.84%. Regardless of ZNGA's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ZNGA's net profit margin of -14.31% significantly underperformed when compared to the industry average.
  • The revenue fell significantly faster than the industry average of 10.9%. Since the same quarter one year prior, revenues fell by 43.3%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • 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 4.35, which clearly demonstrates the ability to cover short-term cash needs.

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