Pacific Crest’s Evan Wilson this morning initiated coverage of online games provider Zynga (ZNGA) with a Sector Perform rating, writing that the company’s valuation is unrealistic with respect to overall industry growth.
“Our negative thesis has little to do with the ongoing uptake of free-to-play or mobile games, or, as Zynga puts it, �the ma- cro of gaming,” writes Wilson, and he gives Zynga credit, he writes, for its “innovations.”
However, he sees all measures of growth threatened by the ins and outs of “the traditional game businesses,” as he puts.
That means rising costs, he thinks.
Zynga�s user base is not benefiting from the growth of Facebook, and as the cost just to maintain its current user base increases rapidly, it is exploring other platforms, including its own, that will likely introduce more costs and lower its hit rate [�] To justify its current valuation, in our view, one would have to argue that industry sales and margins will double, and at the same time, the company will ex- pand its market share. Even if the industry does grow that much, we think it is less than likely that Zynga can maintain its market share given its current position.
Wilson’s estimate for this year is $1.14 billion in revenue and 16 cents EPS, which is below the average $1.44 billion and 19 cents the Street has been modeling.
Zynga shares today are up 30 cents, or 3.7%, at $8.30.
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