Zynga’s Stock Pops Based on a High Chance of Meeting Low Expectations

Ahead of Zynga’s second-quarter earnings report on Wednesday, the company’s stock gained 6 percent on the strong likelihood that it will meet — but not beat — analyst expectations.

Companies normally get a lift when they exceed estimates, but in this case, investor confidence has been so low that some think a meet will be enough to change the tide.

“We expect Zynga to deliver in-line 2Q bookings, which we think is enough to move the stock higher given sentiment in the name remains weak,” according to a note sent on Monday by J.P. Morgan analysts.

Yesterday, Zynga’s stock closed at $5.09 a share, up 6 percent for the day, but down 63 percent over the past four months.

For the second quarter, analysts are estimating bookings of $345 million and non-GAAP earnings per share of six cents a share, representing little to no growth over the previous quarter, when it reported a profit of six cents a share, excluding some items, on bookings of $329 million.

Bookings are what Zynga actually sells in the quarter versus revenue, which is amortized over multiple quarters. It reports these two figures because virtual goods are perceived as having a long shelf life. Bookings are often considered a better measure for how the company did during the immediate period.

Over the past five years, the company has become the largest game maker on Facebook, attracting 292 million users in 175 countries, based on producing hit games such as FarmVille, CityVille and Words With Friends. But as Facebook’s growth has plateaued (which has also been a problem for its own stock), investors have become concerned that Zynga won’t be able to keep accelerating as fast as it once did.

Last month, the company revealed its upcoming plans at Unleashed, which included the announcement of new games such as The Ville and FarmVille 2, a sequel to one of its most popular games. It also talked about its strategy for becoming a publisher of third-party game titles across both Facebook and mobile, but generally, it wasn’t enough to get investors excited enough to buy.

Since then, the company’s CEO Mark Pincus has been eager to talk about the company’s goal of achieving one billion people playing its games.

Last quarter, Zynga warned that it expects slower sequential growth in the first half of the year, with most of its growth weighted toward the second half.  For the full year, Zynga is projecting non-GAAP earnings of 23 cents to 29 cents a share on bookings in the range of $1.4 billion to $1.5 billion. Tomorrow, analysts will be looking closely to see if those projections have changed.

J.P. Morgan suggested that concerns over the company’s growth rates are overblown, and is slightly more bullish than the consensus. Based on information from AppData, which tracks the popularity of apps on Facebook, J.P. Morgan says that the number of people playing Zynga’s games on a daily basis has increased 2 percent quarter over quarter. Additionally, it noted that data only paints one piece of the picture, because AppData doesn’t take into account how many users come from mobile, and that mobile accounted for one-third of Zynga’s total daily users last quarter.

One concern that multiple analysts mentioned was Zynga’s staggered lock-up expirations. Since going public, the number of shares available to trade has increased to 600 million from 100 million, and by mid-August, the so-called float should jump to around 800 million shares. More shares will mean having to please even more investors.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work