Zynga Is a Chinese Takeover Candidate at Content Hungry Web Sites

NEW YORK (TheStreet) -- Unlocking Zynga's (ZNGA) upside potential may happen sooner than expected if content hungry Chinese firms have their way. China's mobile gaming market is growing at an estimated 20% a year and worth about $3 billion.

I think Zynga is a value buy with many possible paths higher. I wrote a Real Money Pro post with exact entries and profit targets that you will want to take a look at.

ZNGA Chart

In comparison, the U.S. mobile game market is valued at $3.2 billion and showing signs of maturity. Industry experts believe the Chinese mobile game market will overtake the U.S. this year. There are already more smartphones in China than the total U.S. population. Worldwide, the 2014 mobile game market is anticipated to exceed $21 billion in revenue.

You may have played one of the many Zynga games and King Digital's (KING) Candy Crush Saga, but are you familiar with Crossfire by G4Box? Crossfire claims 400 million or more users and is the world's number one revenue generating freemium game. In 2013, Crossfire produced almost a billion dollars in revenue.

Chinese gamers started playing Crossfire in 2008 when Asia's largest Internet company, Tencent Holdings bought the Chinese rights. Shenzhen, China-based Tencent Holdings trades on the Hong Kong exchange.

Tencent Holdings bought the Candy Crush Saga Chinese version rights and is in an arms-race for market share against the likes of Baidu (BIDU) Alibaba Group. Yahoo! (YHOO) owns about 24% of the soon-to-IPO Alibaba. It's an IPO that will provide Alibaba and Yahoo! plenty of cash to use for expansion.

Tencent Holdings' war chest is also expanding based on Tencent Holdings' earnings report this month.The company reported a 60% jump in first-quarter profit and stated it intends to leverage its WeChat platform to market mobile games.

The strategy is working, and the shares are trading near the 52 week highs after increasing more than 80% in the last year. Competition for gaming content has never been greater. Zynga is perfectly positioned to deliver what the market wants.

ZNGA Gross Profit Margin (Quarterly) Chart

Zynga was an outside dog until Don Mattrick took the helm last year. In July 2013, Mattrick left Microsoft (MSFT) to take over as CEO and has shifted Zynga's Facebook (FB) dependence towards mobile users independent of Facebook. After serving as president of Worldwide Studios for Electronic Arts (EA), Mattrick eventually went on to become Microsoft's President of the Interactive Entertainment Business.

He was charged with leading Microsoft's strategy for Xbox 360, Xbox One, and Kinect for Xbox. Fortune Magazine named Mattrick one of the "Smartest People in Tech 2011." Fast forward to January this year and Xbox ranked as the number one U.S. game selling platform and commands almost half the software market share. Mattrick is clearly the right leader for turning Zynga into a highly profitable game maker.

In less than a year, Mattrick increased Zynga's real-money online gambling through Facebook in U.K., where it's licensed, bought the maker of mobile games Clumsy Ninja and CSR Racing, NaturalMotion and increased the number of mobile game offerings.

The market is underestimating Mattrick's leadership ability and the growth prospects in Asia. Maybe I shouldn't be surprised considering the dismal failure of King Digital's stock since its IPO earlier this year and Zynga's inability to turn profitable, but how can it not be as obvious as a red neon flashing light that Zynga is near profitability? I understand Wall Street's opinion has decidedly turned into "show me the money", but it's fully priced in.

Actually, Zynga's woes are more than fully discounted after accounting for the super-sized 9% short interest. Almost one out of every ten shares traded is borrowed and sold short. That's a powder keg that only needs a catalyst to blow up short sellers very quickly and efficiently. There are several ways the fuse may become lit.

Zynga could expand its real money gambling beyond the U.K. market. Zynga has the number one play money poker site in the world, allowing for a relatively easy transition to enter into any region of the world. I've written extensively why I believe it's only a matter of time before the company does. Two decades ago, only six states allowed casino gambling; now most states allow casinos.

Asian firms including Alibaba, Tencent, Baidu, Sohu.com (SOHU), SINA Corporation (SINA), and others may purchase large stakes in Zynga or takeover the company completely while the valuation is relatively low. These companies are in the midst of a feeding frenzy and are aggressively competing against each other for a slice of China's growing market.

U.S. based firms including Yahoo!, Google (GOOG), Microsoft, and Facebook are suitor candidates also. Google and Facebook have essentially zero footprints in China and Zynga's games can help open the door. Facebook already works closely with Zynga and none of the above mentioned companies wants to regret watching another buy Zynga cheap.

Remember, China's mobile gaming market is growing at double digits and is expected to become the number one mobile gaming market either this year or next. The U.S. market is likely near its summit, but China continues to grow and perhaps more importantly, the average revenue per paying user is higher in China than the U.S.

Zynga has zero long-term debt, $780 million in cash (about 85 cents per share), and analysts are calling for a cash-neutral 2014. That said, Zynga has met or beat estimates in the last six quarters. If Zynga isn't a buy now, then when

At the time of publication, Weinstein is long Zynga.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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