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Critical Comparison: Zynga Inc. (ZNGA) vs. Weight Watchers International, Inc. (WTW)

Zynga Inc. (NASDAQ:ZNGA) shares are up more than 1.75% this year and recently increased 1.75% or $0.07 to settle at $4.07. Weight Watchers International, Inc. (NYSE:WTW), on the other hand, is up 81.07% year to date as of 05/15/2018. It currently trades at $80.18 and has returned 15.32% during the past week.

Zynga Inc. (NASDAQ:ZNGA) and Weight Watchers International, Inc. (NYSE:WTW) are the two most active stocks in the Multimedia & Graphics Software industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ZNGA to grow earnings at a 30.00% annual rate over the next 5 years.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 24.98% for Weight Watchers International, Inc. (WTW). ZNGA’s ROI is 1.20% while WTW has a ROI of 25.10%. The interpretation is that WTW’s business generates a higher return on investment than ZNGA’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. ZNGA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.01. Comparatively, WTW’s free cash flow per share was +1.03. On a percent-of-sales basis, ZNGA’s free cash flow was -0% while WTW converted 5.22% of its revenues into cash flow. This means that, for a given level of sales, WTW is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. ZNGA has a current ratio of 3.30 compared to 0.70 for WTW. This means that ZNGA can more easily cover its most immediate liabilities over the next twelve months.

Valuation

ZNGA trades at a forward P/E of 23.94, a P/B of 2.15, and a P/S of 3.53, compared to a forward P/E of 21.98, and a P/S of 3.53 for WTW. 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 -7.5% to its one-year price target of 4.40. Comparatively, WTW is -24.59% relative to its price target of 106.33. This suggests that WTW is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ZNGA has a beta of 0.53 and WTW’s beta is 3.20. ZNGA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. ZNGA has a short ratio of 2.26 compared to a short interest of 3.20 for WTW. This implies that the market is currently less bearish on the outlook for ZNGA.

Summary

Weight Watchers International, Inc. (NYSE:WTW) beats Zynga Inc. (NASDAQ:ZNGA) on a total of 9 of the 14 factors compared between the two stocks. WTW is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, WTW is the cheaper of the two stocks on an earnings and book value, WTW is more undervalued relative to its price target. Finally, MU has better sentiment signals based on short interest.

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