Based on analysis of information contained in Zynga's (ZYNG) most recent SEC S-1 filing, we believe that Zynga is going to have a hard time justifying the $14 billion valuation mentioned on page 71 (S-1 page 71).
Zynga is the world’s leading social game developer. Substantially all of its revenue is generated from players accessing Zynga games via the Facebook platform.
Zynga filed an amended S-1 on September 21. In looking at the filing we focus on the rate of change in user metrics and net income. What follows is a mostly negative view of Zynga’s recent metrics.
A bright spot, however, is the recent introduction of a new game that seems to be catching on very quickly, Empires & Allies, launched in June 2011. A strategy and combat game, Empires & Allies in its first month became the second most played game on Facebook, based on monthly average users as measured by AppData.
If Zynga can continue to launch more games that perform as well as Empires & Allies, then metric and income comparisons should be more favorable. However, high multiple stocks usually aren’t so dependent on a problematical flow of blockbuster new products.
Regarding bookings, Zynga has this comment,
To provide investors with additional information about our financial results, we disclose within this prospectus bookings, a non-GAAP financial measure.
(S-1, page 11)
Whenever a company boldly creates its own accounting conventions, investors question whether it’s just a restatement to pull the wool over investors eyes. Groupon (GRPN) is the prime current example, although in the case of Groupon, the SEC pushed back and made it conform to general accounting principals.
‘Bookings’ in the case of Zynga is simply shorthand for assuming all revenue occurs when a customer agrees to buy something from Zynga over a period of time. Traditional accounting suggests that income should be allocated over the life of the contract or commitment.
For the June 2011 quarter versus the March 2011 quarter, bookings fell to $$275 million from $287 million. The September quarter bookings will in all probability show an uptrend, based on Empires & Allies. (S-1, page 60)
Regarding their top three games, Zynga said
Our top three games historically have contributed the majority of our revenue. Our top three games accounted for 93%, 83%, 78% and 59% of our online game revenue in 2008, 2009, 2010, and for the six months ended June 30, 2011, respectively. (S-1 page 2)
This means Zynga diversified its game offerings, but sequential quarterly metrics comparisons for 2011's June quarter versus the March quarter are not favorable.
For example, consider user metrics comparing the June 2011 quarter with the March 2011 quarter:
. Daily active users to declined to 59 million from 62 million.
. Monthly active users declined to 228 million from 236 million.
. Monthly unique users increased slightly to 151 million from 146 million.
(S-1, page 4)
Net income for the three months ended June 2011 compared to March 2011 declined 83% to $1.4 million from $16.8 million – net income down 83%? (S-1, page 60)
Best of all…in August 2011, the company obtained an equity valuation of “$14.05 billion based on fully diluted shares outstanding.” (S-1 page 71)
As for Zynga management and its consultants, imagine showing quarterly income of only $1.4 million and a $14 billion valuation at the same time? At a $14 billion valuation, Zynga is an obvious short.
We have always had questions about Zynga and its valuation.