Zynga stock a good buy

ZNGA has finally started to take-off and the shareholders who heeded my advice to hold the stock have made substantial gains in the last few days. When I started covering Zynga in May last year, I was concerned about the company's ability to enhance its margins. I focus on fundamentals and I was concerned about the deterioration in margins.

However, CSR2's successful launch and effective monetization of its popular titles increased my confidence in the turnaround and I recommended Zynga as a "hold. I still wanted to see more improvement in fundamentals before changing my theses on the stock.

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The progress over the last six months shows that the success of CSR2 was not a one-time hit and the management is showing some serious commitment to the turnaround efforts. I now believe that Zynga has entered the growth phase and it is a good time to buy the stock. Curious thing about the first quarter results was that Zynga was able to reduce its overall loss despite a decrease in its gross margin. The increase in revenue in absolute terms is slightly larger than the increase in cost of revenue.

So, this shows that Zynga's cost of sales has indeed been growing at a faster pace than its revenue. Mind you, marketing, sales and admin expense largely remain unchanged. There has been a small increase in both these expenses.

Is Zynga, Inc. (ZNGA) a good buy? | Top Chronicle

Worse than the market expectations of a loss of 2 cents a share. Research and development, however, is a discretionary expense and the management can easily adjust it downwards. Zynga has been playing with this expense in the past, so this is not something new for the company. This is an expense that has been unpredictable when it comes to analyzing the margins of the company. Revenue expectations are encouraging but the cost of sales needs to come down.

Again, this figure needs to be controlled and Zynga needs to spend less on revenue generation in order to be profitable. However, costs need to be controlled in order to enhance cash position. Zynga will need to spend more on marketing and other operating expenses, which will further put pressure on its profitability.

Controlling costs at the start and improving gross margin will help it achieve better margins. For a tech company like Zynga, margins and profitability measures are usually ignored by the investors.

They tend to focus more on technical measures such as daily unique users and unique payers. On these measures, Zynga has shown progress, which has impressed the investors. These improvements are a sign that the management is able to generate more revenue from its offerings.

Progress on these metrics is usually followed by better profitability and cash flows. The image below is taken from the Q and shows improvement in these metrics over the last year.

Zynga is still at the early stages of its turnaround and improvement in metrics like MUP monthly unique payers shows that the company is able to extract money from new customers. This is an encouraging sign. Short-term profitability will likely remain under pressure due to the rising costs. However, if the above-mentioned metrics continue to improve, then profitability will eventually follow. Improvement in these numbers will push the stock price higher. This earnings announcement has changed the mood of investors towards Zynga.

Another quarter or two of growth in MUPs and MUUs should give momentum to stock price. It is a good time to consider Zynga. I wrote this article myself, and it expresses my own opinions.

I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. Long Ideas Short Ideas Cramer's Picks IPOs Quick Picks Sectors Editor's Picks. Is It A Good Time To Consider Zynga? Summary Gross margin has taken a hit, showing that the costs grew at a faster pace than revenue. Zynga has shown improvement in key technical metrics for a tech company.

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