EA Could Replace Zynga As 15% of Facebook's Revenue

Analyst Arvind Bhatia of Sterne Agee says he doubts Zynga (NASDAQ: ZNGA) will be 15% of Facebook's (NASDAQ: FB) revenue in the future. Bhatia explains, “Facebook's own revenue is going to continue to grow at a much higher pace than Zynga's revenue.”

Bhatia says he believes Electronic Arts (NASDAQ: EA), and other gaming companies are going to become increasingly important to Facebook. He also says that Facebook will achieve a larger and larger percentage of advertising budgets, since people are spending so much time on the site.

Bhatia initiated coverage on Facebook earlier today giving it a Buy recommendation, while he gives Zynga an Underperform rating. “Facebook is a completely different animal,” remarks Bhatia. “It is disrupting the advertising market.”

He points out that Facebook's addressable market is much bigger than Zynga's, and that 94% of Zynga's revenue comes from Facebook gaming. Bhatia explains, “If you look at their projections for the virtual goods market, what's interesting is that they are projecting the market to grow at 9% today.” That is down from more than 20% several months ago, comments Bhatia.

Shares of Zynga are currently trading around $8.30, close to its 52-week low of $7.95. The firm's loss per share is $1.30. However, the company's actual EPS has exceeded consensus analyst EPS expectations by 20% or greater for the past two quarters, earning $0.06 per share vs $0.05 expected last quarter.

Shares of Electronic Arts are also trading near their 52-week low of $14.74. The firm has a loss per share of $0.54, and a market capitalization of almost $5 Billion. The company is trading down more than 25% year to date. The game developer has taken losses for two of the previous 4 quarters, but has exceeded consensus analyst EPS expectations on all of the previous four quarters. Analyst consensus EPS estimates for EA's current quarter were $0.18 60 days ago and have declined to $0.16 currently. EA is set to release earnings after today's market close.

Disclosure: At the time of this writing, I did not own shares of any companies mentioned in this post.