Zynga Inc. (NASDAQ:ZNGA) shares are up more than 48.64% this year and recently increased 1.33% or $0.05 to settle at $3.82. Glu Mobile Inc. (NASDAQ:GLUU), on the other hand, is up 102.58% year to date as of 10/30/2017. It currently trades at $3.93 and has returned -8.18% during the past week.
Zynga Inc. (NASDAQ:ZNGA) and Glu Mobile Inc. (NASDAQ:GLUU) are the two most active stocks in the Multimedia & Graphics Software industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ZNGA to grow earnings at a 30.00% annual rate over the next 5 years. Comparatively, GLUU is expected to grow at a 15.00% annual rate. All else equal, ZNGA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. ZNGA’s ROI is -7.40% while GLUU has a ROI of -33.70%. The interpretation is that ZNGA’s business generates a higher return on investment than GLUU’s.
If there’s one thing investors care more about than earnings, it’s cash flow. ZNGA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.04. Comparatively, GLUU’s free cash flow per share was -0.03. On a percent-of-sales basis, ZNGA’s free cash flow was 0% while GLUU converted -0% of its revenues into cash flow. This means that, for a given level of sales, ZNGA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. ZNGA has a current ratio of 3.40 compared to 1.20 for GLUU. This means that ZNGA can more easily cover its most immediate liabilities over the next twelve months. ZNGA’s debt-to-equity ratio is 0.00 versus a D/E of 0.00 for GLUU. ZNGA is therefore the more solvent of the two companies, and has lower financial risk.
ZNGA trades at a forward P/E of 28.94, a P/B of 2.09, and a P/S of 4.21, compared to a forward P/E of 34.17, a P/B of 2.75, and a P/S of 2.29 for GLUU. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ZNGA is currently priced at a -9.91% to its one-year price target of 4.24. Comparatively, GLUU is -5.76% relative to its price target of 4.17. This suggests that ZNGA is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for ZNGA and 2.20 for GLUU, which implies that analysts are more bullish on the outlook for ZNGA.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. ZNGA has a beta of 0.72 and GLUU’s beta is 1.77. ZNGA’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ZNGA has a short ratio of 2.32 compared to a short interest of 1.20 for GLUU. This implies that the market is currently less bearish on the outlook for GLUU.
Zynga Inc. (NASDAQ:ZNGA) beats Glu Mobile Inc. (NASDAQ:GLUU) on a total of 8 of the 14 factors compared between the two stocks. ZNGA is growing fastly, generates a higher return on investment, has higher cash flow per share and higher liquidity. In terms of valuation, ZNGA is the cheaper of the two stocks on an earnings and book value, ZNGA is more undervalued relative to its price target. Finally, EA has better sentiment signals based on short interest.