We think all investors should try to buy and hold high quality multi-year winners. While the best companies are hard to find, but they can generate massive returns over long periods. For example, the Zynga Inc. (NASDAQ:ZNGA) share price is up a whopping 502% in the last half decade, a handsome return for long term holders. If that doesn't get you thinking about long term investing, we don't know what will. On top of that, the share price is up 35% in about a quarter. But this could be related to the strong market, which is up 16% in the last three months.
We love happy stories like this one. The company should be really proud of that performance!
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During five years of share price growth, Zynga moved from a loss to profitability. On the other hand, it reported a trailing twelve months loss, suggesting it isn't reliably profitable. So it might be better to look at other metrics to try to understand the share price.
On the other hand, Zynga's revenue is growing nicely, at a compound rate of 17% over the last five years. In that case, the company may be sacrificing current earnings per share to drive growth.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Zynga is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.
A Different Perspective
We're pleased to report that Zynga shareholders have received a total shareholder return of 62% over one year. That gain is better than the annual TSR over five years, which is 43%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. To that end, you should be aware of the 2 warning signs we've spotted with Zynga .
But note: Zynga may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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