What Is a Better Investment Right Now: Zynga or Ubisoft?

These two companies are about to be direct competitors as one pivots its business, but which is the better investment: Zynga or Ubisoft?

Aug. 30, 2021

Zynga (NASDAQ: ZNGA), a major provider of mobile games, is about to face competition from veteran game-maker Ubisoft (OTCMKTS: UBSFY) as it pivots its business to mobile and free-to-play gaming in order to capture more players and avoid franchise fatigue. The pandemic provided tailwinds for Ubisoft (sales grew by 40% last year) that disappeared once people started to return to relative normalcy. 

Zynga, on the other hand, suffered no such fate and is even expected to retain 75% of all pandemic gains for the next few years.

Both have a rich library of games to offer their growing user bases, but which is the better investment right now: Zynga or Ubisoft?

Zynga: bulls and bears

Zynga’s last quarterly report (Q2, 2021) was outstanding on two fronts. On the financial side, revenue grew by nearly 60%, bookings (sale of virtual goods) were up by roughly 38%, and advertising revenue surged by nearly 110%, year-over-year (YoY). As for its user base, the growth was nothing short of spectacular with both daily active users (DAUs) and monthly active users (MAUs) growing 87% and 194%, respectively YoY. Guidance for the year doesn’t look too shabby either with revenue growth expected to be 38% and bookings to be greater than 23% YoY. 

Not only does Zynga have a formidable roster of games that includes the addictive ‘Words with Friends’ series and ‘Zynga Poker,’ but it’s constantly working on enhancing the user experience. Perhaps this explains the company’s popularity as evidenced by its 4 billion downloads by users worldwide. The company is an acquisition powerhouse as well, having made 30 since its inception, the latest being Rollic, owner of many blockbuster titles and a few top annual downloads. In its release pipeline, players can expect ‘Farmville 3’ and its first ‘Star Wars’ game later this year and next year, respectively.

One metric that doesn’t look very good for the company is the Monthly Unique User (MUU) count, which is down nearly 30% YoY, indicating a plateau in user growth. Another point for the bears is Apple’s recent Identity for Advertisers drive to protect user privacy. This will probably have an impact on Zynga’s revenue from targeted ads.

Ubisoft: bulls and bears

Ubisoft’s last quarterly was unimpressive, to say the least, but its ambitions are quite exciting. Over the coming years, the company plans to take its most popular titles mobile with hopes of making them high-margin forever franchises, or games that make at least $100 million annually. Additionally, the company’s future intellectual property (IP) will be developed focusing on long-term player engagement (that translates to more bookings). Finally, it will partner with Disney for its huge brands like Avatar and Star Wars to release games; popularity in the entertainment realm is always a safe bet.

With a current price of $12.50, the company is considered undervalued. It just needs one hit in the mobile realm to be cooking with gas again and in this case, past performance is indicative of future results. After all, this is the company responsible for hugely popular titles like ‘Assassin’s Creed’ and the ‘Tom Clancy’ series and these games have unique player numbers nearing 100 million each. Imagine what the bookings would be for a title like this on mobile. 

Ubisoft’s last earnings report is the big elephant, or rather bear, in the room. Sales were down over 17% and net bookings dropped 20.5%, YoY. The company’s stock price is down over 37% year-to-date (YTD) and investors rightly fear that the company’s recent uptick in earnings was only pandemic related and thus will not be repeated.

So, which is the better buy right now?

Ubisoft is the safer bet as it has huge potential. It has experience and success in creating hugely popular blockbuster titles which will no doubt be migrated to mobile. Consider Activision Blizzard’s ‘Call of Duty,’ which was migrated to mobile and was a huge success. It was downloaded 500 million times and generated $1 billion in revenue; no doubt, Ubisoft can find similar successes with its lineup. Additionally, while Zynga’s user base stagnates, Ubisoft has a whole world of new users to mine from the mobile world.

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