Zynga Inc

Zynga Inc (Nasdaq: ZNGA) develops and markets social games on mobile platforms. It also generates revenue from advertising services and mobile game downloads.

Investment Rationale – SPECULATIVE BUY at USD 10.08

• Q1 FY21 results surpassed the Company’s guidance by a significant difference, which generated strong momentum for the growth strategy.
• Zynga would attain a considerable competitive advantage with the combination of Chartboost’s tech capabilities.
• Over the coming years, the Company expects to drive top-line growth and margin improvement since it has the ability to increase the total addressable market.
• From a technical standpoint, ZNGA’s stock price is hovering around the lower band of the Bollinger Bands, while 14-day RSI (~40.75) indicates a positive stance at the current levels.  
• In terms of forward 12-month valuation metrics, EV/Sales, EV/EBITDA, and Price/Book multiples are lower than the Technology industry’s median.

Risk Assessments

• The net increase in deferred revenue and higher amortization of acquired tangible assets can impact the gross margins even in the future.
• It operates in an industry that is subject to a rapid change in technology due to intense competition. Hence, operating results are volatile and difficult to predict.
• It is a lossmaking entity, and its growth trajectory depends on external financial resources.

Recent News

Acquisition: On 5 May 2021, Zynga acquired Chartboost (mobile programmatic advertising and monetization platform) for nearly US$250 million in cash.

Financial Highlights for the quarter ended 31 March 2021 (as on 5 May 2021)

 (Source: Company Website)

• Zynga delivered an excellent start to FY21, with better results in Q1 FY21 than the previously provided guidance.
• The Company reported revenue growth of 68% year-on-year in Q1 FY21, driven by strong growth from both online game business and advertising.
• It reported a net loss of US$23 million in Q1 FY21; however, the loss is US$27 million better than guidance, on the back of excellent operating performance.
• During the first quarter, Zynga also achieved record average mobile daily active users (DAUs) of 38 million, representing an 85% year-on-year growth.

Share Price Chart    (Analysis done by Kalkine Group)

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative)

Conclusion

Following the upbeat Q1 FY21 performance and Chartboost’s acquisition, Zynga is in a great position to increase the addressable market and generate a significant value for its shareholders. Moreover, the strength of live services portfolio, new game launches, strong momentum of the hyper-casual portfolio, and significant increase in DAUs shall help in achieving its long-term operating margin goals.

In terms of Q2 FY21 guidance, Zynga expects to report 49% year-on-year growth in revenue with 37% year-on-year growth in bookings.

(Source: Company Website)

The stock made a 52 week High and Low of USD 12.32 and USD 7.77, respectively. On the technical chart, the next important support level is at USD 8.27.

Based on the decent trading momentum, Chartboost’s acquisition, revenue and booking guidance, with support from valuation conducted above, we have given a “SPECULATIVE BUY” stance on Zynga Inc at the current price of USD 10.08 (as on 16 June 2021, at 9:55 AM ET), with a lower double-digit upside potential based 4.33x EV/Sales (approx.) on FY21E Sales (approx.).

Hexo Corp

Hexo Corp (NYSE: HEXO) is a consumer-packaged goods cannabis entity in Canada with global ambitions.

Investment Highlights – WATCH at USD 5.87

• Although the Company has reduced operating expenses by 17% in Q3 FY21 from Q2 FY21, it is still reported a loss from operations.
• Due to production issues, sales of adult-use non-beverage got impacted, which reduced the Q3 FY21’s net revenue against Q2 FY21. Moreover, the impact of the COVID-19 third wave in Ontario in still uncertain.
• From a technical standpoint, 20-day EMA (USD 6.45) is sustaining quite above the current market price, reflecting a bearing momentum.
• Over the past three months, HEXO’s stock price has yielded a negative return of ~24%, significantly lower than the ~5% positive return of the NYSE composite index.

Key Risks

• Hexo has been reporting net losses since its inception. Therefore, its growth trajectory is dependent upon its ability to obtain external financial resources. Amid uncertain macroeconomic conditions, it can also face liquidity issues.
• Cannabis-infused beverage market is exposed to tight regulatory policies as well.

Recent News

Acquisition: On 1 June 2021, Hexo announced the closing of arrangements pertinent to the acquisition of outstanding stake in Zenabis, which is likely to provide accretive synergies.

Q3 FY21 Financial Highlights (for three months ended 30 April 2021, as of 14 June 2021)

 (Source: Company website)

• Hexo’s net sales increase by 2% year-on-year in Q3 FY21; however, net sales decreased by US$10.2M from the previous quarter.
• The net loss remained in line with the previous quarter (Q2 FY21).
• At the end of Q3 FY21, the Company had US$194M of cash on hand, as working capital remained strong.
• In order to mitigate future interest and administrative costs, Hexo paid off its outstanding credit facility of US$28,875.

Share Price Chart

 (Analysis done by Kalkine Group)

Conclusion

Hexo’s stalled revenue and continued losses amid strain cultivations and disrupted supply chain keeping the outlook gloomy. However, the Company has a dominant position in the Quebec province and a solid portfolio of cannabis patents filed in Canada. In the absence of guidance and lossmaking position, we are unable to punt on this stock presently. Notwithstanding, we will maintain a close watch over stock and will review the upcoming market catalysts. The stock made a 52-week High and Low of USD 11.04 and USD 2.32, respectively.

Based on weak fundamentals, macroeconomic uncertainties, lossmaking position, we have given a “Watch” stance on Hexo Corp at the current market price of USD 5.87 (as of 16 June 2021, at 9:40 AM ET), while we look forward to reviewing the FY21 results.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).