The video gaming industry has witnessed a significant surge in its user base owing to the remote lifestyle trend amid the COVID-19 pandemic. The introduction of innovative games should also keep driving the industry’s growth amid the reopening of the economy. But we don’t think Zynga (NASDAQ:ZNGA) is fit enough financially to capitalize on the industry’s growth. Therefore, investors could instead bet on shares of fundamentally sound video game companies Activision Blizzard (NASDAQ:ATVI), Electronic Arts (EA), and Playtika (PLTK). So read on. Let’s pore over these names.San Francisco-based social game services provider Zynga Inc .’s (ZNGA) total revenue increased 40% year-over-year to $704.7 million in its third quarter (ended September 30, 2021). However, its total costs and expenses increased 14.7% year-over-year to $717 million. Its cash and cash equivalents came in at $1.09 billion for the period ended September 30, 2021, compared to $1.36 billion for the period ended December 31, 2020. Along with weak financials, its 0.35% trailing-12-month CAPEX/Sales ratio is 90.8% lower than the 3.77% industry average. And its trailing-12-month net income margin is negative compared to the industry 5.73% average.
The stock has declined 38.5% in price over the past six months to close yesterday’s trading session at $6.34. Furthermore, JPMorgan (NYSE:JPM) analysts recently reduced ZNGA’s price target to $10 from $12. Also, in terms of forward EV/S ratio, the stock’s 2.59x is higher than the 2.43x industry average. And its 2.63x forward P/S is 50.6% higher than the 1.75x industry average. So, it may not be a wise bet to cash in on the industry’s growth.
However, the demand for video games has skyrocketed due to the COVID-19 pandemic-led remote lifestyle. While easing restrictions this year have been shifting consumers’ focus to outdoor activities, the increasing availability of innovative online, mobile, and cloud gaming should keep driving the industry’s growth. According to a Fortune Business Insights report, the global gaming market is expected to grow at a 13.2% CAGR between 2021 and 2028. Therefore, we think investors seeking to benefit from the industry’s growth could instead bet on quality video game stocks Activision Blizzard, Inc. (ATVI), Electronic Arts Inc . (NASDAQ:EA), and Playtika Holding Corp. (PLTK) instead.