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Zynga Expects Its Mobile Gaming Empire to Grow More Than 30% In 2021

Zynga (NASDAQ: ZNGA) is making some serious hay right now. The mobile video game leader capped off 2020 with a 52% year-over-year increase in revenue during the fourth quarter. It also issued more convertible notes in December for net cash proceeds of $794 million, leaving it with $1.57 billion in cash and short-term investments at the end of the year.

Mobile has become the largest market in the global video game industry, a trend reinforced by the COVID-19 pandemic. But Zynga is more than just an investment in the stay-at-home consumer. This company is flexing its muscles and looking to expand into new areas -- making it a top growth name in the video game world.

Image source: Getty Images.

2020 by the numbers

Zynga's Q4 revenue accelerated from the prior quarter, boosted by its acquisition of Peak (Toy Blast and Toon Blast) and Rollic (Go Knots 3D and Tangle Master 3D) game producers earlier in the year. There was plenty of organic growth too, as ever-popular franchises like Words With Friends, new puzzle game launches, and live events kept users coming back to play. Advertising, which has become a minority share of total revenue, also rebounded strongly after the marketing freeze last spring at the onset of the pandemic. In total, it all equated to a 120% year-over-year increase in free cash flow in Q4 to $197 million (good for a very health free cash flow profit margin of 32%).

Zynga had a great 2020 -- mobile games were more popular than ever before, giving it serious momentum as it enters 2021.

Metric

2020

2019

Change

Revenue

$1.97 billion

$1.32 billion

49%

Adjusted EBITDA

$266 million

$87.2 million

205%

Free cash flow

$410 million

$239 million

72%

Data source: Zynga.

Live events and cross-platform play are Zynga's future

A few years ago, Zynga was a small mobile game publisher struggling to gain traction. Today, it's a fast-growing business with an even faster-expanding bottom line. Zynga said it will use its momentum to make further acquisitions in the next couple of years to gain greater scale in the important mobile games market.

Specifically, management said to expect revenue growth of 32% for full-year 2021, and low-double-digit percentage growth on top of that in 2022 (excluding any future takeovers). Live events, new advertising technology, and new game titles from Peak and Rollic will be important parts of the strategy over the next two years, but the mobile leader is eyeing some new trends too. Specifically, management said several cross-platform games (multiplayer games that can be played together by users of various devices) are in development.

Cross-platform titles have been big hits in recent years (think global free-to-play sensation Fortnite or Minecraft), and Zynga sees potential to expand here. It already has key cloud computing relationships established -- like with Amazon Web Services and development platform Unity Software -- to make its push into cross-platform titles possible. Along with its recent publisher acquisitions and the promise that other takeovers are under consideration, it will be interesting to see where Zynga goes next.

I like the company's chances. Even after a busy year, Zynga has $283 million in net cash and equivalents on its balance sheet and a large, steady stream of free cash flow generation coming in each quarter. Still a small-ish company with a market cap of just under $13 billion and trading for 31 times trailing 12-month free cash flow, Zynga looks like a long-term value after its final report for 2020.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo owns shares of Unity Software Inc. and Zynga. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon, Unity Software Inc., and Zynga and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.


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