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The Ratings Game

Zynga's battered shares draw support

SAN FRANCISCO (MarketWatch) -- Zynga Inc.'s heavily battered stock drew fresh support from a handful of analysts Wednesday, giving a small lift to the stock by early afternoon.

Evercore Partners upgraded Zynga (ZNGA) to an equal-weight rating, removing its sell call on the maker of popular Facebook games such as "FarmVille" and "CityVille."

J.P. Morgan and Lazard Capital reiterated their respective buy recommendations, though J.P. Morgan lowered its price target on the shares to $11 from $14.

Zynga's shares were last trading up 1.2% to $5.04, moderating from an earlier gain of more than 4%. The stock had lost about 17% over the last two previous sessions -- and has plunged more than 65% from its closing high of $14.69 in early March. Zynga went public in late December at $10.

"Concerns around user growth have added to investors' unwillingness to get in front of the company's staggered lock-up expirations, which culminate in August," Doug Anmuth of J.P. Morgan said in a research note.

More than 300 million shares held by employees and other insiders were freed from their post-IPO lockup earlier this month, with another 200 million slated to be unlocked by mid-August.

"More cautious sentiment around newer Internet companies and multiple compression in traditional console gaming stocks have also contributed," Anmuth wrote.

Zynga's business is heavily reliant on Facebook Inc. (FB) , which accounts for the large bulk of its revenue. Metrics from AppData have showed a decline in Zynga's daily average user base on Facebook, down more than 8% during the month of May.

Anmuth believes Zynga's overall usage growth will "increasingly diverge," especially as mobile gaming becomes a larger part of the company's business.

Analyst Atul Bagga of Lazard added that mobile games "could be monetized at the same if not a higher level than that of web games." He said investors should key in on "monetization growth" at Zynga, rather than user growth.

"We believe that a tighter social integration with iOS and GameCenter could help improve discoverability and distribution of games on mobile platform, and is positive for game publishers," he wrote. "We are optimistic about [Zynga's] positioning on mobile given its strong positioning in social games."

Ken Sena, analyst at Evercore, remained cautious on Zynga but noted that the shares' valuation is now more on par with videogame peers such as Activision Blizzard(ATVI) . The lower valuation on the shares, he wrote, is "more justified and presenting diminished downside risk."

However, Sena noted that he maintains some concerns around the company's business, including weaker user trends and the additional lock-up expirations.

"In spite of the upgrade, we continue to have fundamental concerns with the business' long-term growth sustainability, including Zynga's Facebook reliance, where traffic acquisition costs are increasing, and limited barriers to entry," he wrote, putting a $5 price target on the shares.

Zynga's holding an event at its San Francisco headquarters on June 26, when it's expected to preview upcoming game releases. Analysts believe the event could act as a "catalyst" for the stock.