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Is Phone Game Company Zynga A Buy?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

To help you figure out where to invest, today I answer… Is Phone Game Company Zynga A Buy?

Zynga (ZNGA) is a creator of “social games” mainly for phones and use in internet browsers.

Some of its most famous and popular games are Zynga Poker, Words With Friends 2, Farmville 2, Empires & Allies, and more.

Its based in San Francisco California.  It has a $10.4 billion market cap. And it earns large profits… Which is reason #1 to consider buying its stock.

Micron Earns Large Free Cash Flow… Sort of

Over the last decade it earned an average operating income margin of negative 11.2% per year.  

I look for anything above 10% consistently. 

Another way to gauge a company’s profitability is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 9.3% per year on average.  

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great potential investment.

Zynga’s numbers are split there though so what does this mean?

Pay more attention to the negative operating profits than the positive free cash flow.

Why?

Because the only reason cash flow is positive over the last decade is because Zynga continually issues a ton of shares.

In 2010 Zynga had 264 million shares outstanding… Now it has 993 million shares.

This is an increase of 276% in this time.  And it also means from 2010 to today Zynga’s diluted shareholders by 276%…

Meaning all else remaining equal if you owned Zynga shares from 2010 to today your 2010 shares are worth 276% less today than they were in 2010… Just from the dilution.

And because Zynga remains unprofitable on an operating basis this dilution is likely to continue… Making your shares worth less and less over time.

Think of this like inflation and how this constantly lowers the worth of the US dollar over time.  In the short term and specific cases, dilution is fine… And it can be even good.

But over the long term its generally horrible and lowers the value of Zynga shares drastically.

These profits also allow it to have ultra low debt numbers as well.

Zynga Does Have Low Debt

As of this writing it has $760 million in cash compared to $730 million in debt.

As a percentage of its balance sheet total liabilities make up 45.4%.

And its debt-to-equity ratio is 0.26.

These are all well below what I look for in an investment, which adds a huge margin of safety to potentially buying Zynga stock.

But what about its valuation?  Is it cheap enough to buy? 

Zynga IS NOT Cheap

With the markets at or near all-time highs you’d expect a decent stock like Zynga to be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 143.9.

Its P/CF is 30.3.

Its forward P/E is 36.6.

And its enterprise value to operating income – EV/EBIT is 196.4.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These show that Zynga is massively overvalued right now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

With Zynga being so overvalued this makes it riskier.  Especially when considering its large share dilution and unprofitability.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy – stay away from Zynga… And consider investing in some of the stocks below.

Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above

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