The Tricky Zynga IPO

By: ispeculatornew
Date posted: 07.12.2011 (5:00 am) | Write a Comment  (0 Comments)

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Zynga is not a household name but its main products certainly are. As Zynga gets ready to turn public at a $15-20 billion valuation, many questions remain. Is Zynga a long term buy? Or should we wait before buying the shares? Zynga is far from unique in the fact that many questions surround it. I would say that it’s the case for most recently turned public companies such as LinkedIn (LNKD) and Pandora (P). I personally think there is little downside risk involved in Facebook but I can see how others would disagree.

Zynga Factors

New Games

Despite its millions of users, and incredible success on some games such as Farmville and CityVille, it is not clear that Zynga will be able to continue developing these huge success games. In a world where any kid in his garage can create games played by millions, being the one coming up with the top products over and over seems like unlikely.

Facebook Dependancy?

This has been discussed over and over but I think it’s warranted. Since most Zynga gamers access the game through Facebook, it’s justified to worry about that dependent relationship. You could argue that Facebook also depends on Zynga and you would be right to some extent. Zynga contributes to a major part of Facebook’s revenues both through the “in game” credits that users pay (which Zynga is taxed at a 30% rate on Facebook) and is likely Facebook’s most important advertiser. However, the relationship is not exactly on an equal basis either. In a world where the platform is everything, Facebook, like Apple and Google controls a platform while Zynga is a user. In the most recent negotiations, it was unclear what type of agreement would come out and while the 5 year agreement where Zynga agrees to use Facebook credits and give back 30% of its revenues seems “fair,” it’s also worrying. What would have happened if Facebook would have asked for 40% instead? Or adding other conditions? While it was probably unlikely, it remained a possibility. Which is true: Facebook depends on Zynga or is it the opposite. I would argue for the latter.

Lack Of A Platform

Depending on Facebook’s platform is worrying but even more so in my opinion is the fact that Zynga does not seem to be working on any type of platform. To be fair, building one is complex, costly and an uphill battle especially in games that are as social as the Zynga games. That being said, I’m not sure how Zynga will be able to strive when it always depends on other platforms. If over the next few years Zynga can gain a bigger presence on Apple’s products and in Android, that would already be a major step.

Competition

The gaming industry has seen tremendous growth in the past 2 decades and the explosion in the mobile/Smartphone markets has been critical in the demand explosion. That has obviously been great for game developers such as Zynga but it also means incredible competition and that has translated into many different things; pressure on pricing, increasing costs to develop games both in terms of technology and hiring.

Financials

Zynga’s financials were released when it officially filed for its IPO. The company is growing quickly. After revenues of $597 million in 2010, it had revenues of $235 million in this year’s first quarter alone. Revenues and users are certainly impressive and while the company is profitable, it is less so than many had thought. Zynga had earnings of $90.6 million last year and $11.8 in Q1 of this year.

A Worthy Gamble?

Compared to many of the recent IPO’s, I do think Zynga has some potential to turn into a great investment. It is far from a sure thing but I do consider the gamble to be worth a try. Obviously, after knowing more about Zynga’s revenues and profitability, I do feel even stronger and depending on the valuation when Zynga will indeed go public, I could very well be buying some shares. I do think that social gaming will continue to see tremendous growth for years to come and as the leader in the sector (with 60 million daily users!!), Zynga seems like a great investment opportunity.

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