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Why Zynga Stock Popped 10% This Morning

What happened

Shares of social gaming star Zynga (NASDAQ: ZNGA) popped 11.4% in early-morning trading Wednesday after the company reported third-quarter earnings Tuesday that were just OK, but good enough to keep the company's turnaround story going. Analysts  who follow the stock had expected Zynga to report $0.02 per share in profit on Tuesday, and that's exactly what Zynga did.

Investors in the FarmVille maker are riding a bull (market) this morning. Image source: Getty Images.

So what

On the other hand, Zynga also posted revenue of $224.6 million for the quarter, which was significantly above the $209.8 million that Wall Street had predicted. Zynga characterized the results  as its "best topline performance in over 4 years," and noted that its $18.1 million in net income for the quarter amounted to a $59.8 million improvement when compared to last year's Q3 loss.

From a cash perspective, Zynga generated positive free cash flow of $32.4 million, 10% less than in the prior-year quarter. Still, it was enough to bring Zynga's cash profits to $61.3 million for the first nine months of this year, more than twice the $25.7 million in cash profit generated through the first three quarters of fiscal 2016.

Now what

Guiding investors on what to expect next quarter, management predicted that Q4 revenue will come in at $215 million and generate net income of $13 million -- roughly equal to all the profits Zynga has earned through the first three quarters of this year. If that's the way things play out (pun intended), Zynga should end the year with profits of $26.7 million and a P/E ratio of more than 130.

That sounds expensive to me, but apparently it's cheap enough to be enticing buyers of Zynga stock this morning. As of 11:15 a.m. EST, Zynga shares are still up 9.7%.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.