If you know gaming at all, you might think that I’m absolutely crazy for even asking the question. Maybe so. Zynga (ZYNG) is however scheduled to turn public this year at a valuation of around $20 billion. That is almost to the dollar what Activision (ATVI) and EA (ERTS) are currently worth. That gives us a great opportunity to compare very different companies. When you consider the two giants and the fact that Zynga did not exist just a few years ago, it’s difficult to understand how this question could even be asked.
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Could Electronic Arts and Activision Blizzard Be The Next Blockbuster?
Having a dominant position in a big market but being too slow to adapt to new platforms. That is what happened to Blockbuster when it failed to adapt quickly enough to compete with Netflix (NFLX). Is the same about to happen to Electronic Arts and Activision Blizzard? They have certainly turned out to be very late in social gaming and on platforms such as Facebook. Will those turn out to be fatal mistakes? I would say it’s unlikely. Most games remain bough for consoles such as Sony’s Playstation and Microsoft‘s (MSFT) Xbox where Zynga is not even trying to compete.That being said, there is no doubt that the much broader market that Zynga is going after is a major market that the established players did not even go after until a few months ago. Was it too late? It’s still very early to tell.
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A Look At The Numbers
It is fairly clear that Zynga is a much smaller player, with most of its value depending on much higher growth and a better overall business model than Electronic Arts and Activision Blizzard. You can take a look at the revenue numbers here:
| 2008 | 2009 | 2010 | 2011 | |
|---|---|---|---|---|
| Zynga | 19.4 | 121.5 | 597.5 | 1044.1 |
| Eletronic Arts | 3665 | 4212 | 3654 | 3589 |
| Activision Blizzard | 3026 | 4279 | 4447 | 5072.5 |
Revenues
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And earnings in terms of EBITDA:
| 2008 | 2009 | 2010 | 2011 | |
|---|---|---|---|---|
| Zynga | 4.5 | 168.2 | 392.7 | 354.7 |
| Eletronic Arts | -157 | -352 | 12 | 471 |
| Activision Blizzard | 421 | 1034 | 1312 | 1538 |
EBITDA
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We could also compare metrics such as the number of players or others
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Trend Is Not As Obvious As You Would Think
The strangest part about the new much smaller player being valued so high is that its growth seems to have taken a major hit. Why? There are a number of reasons. First, Zynga has not released many games lately and its business model is similar to a movie studio where users, and thus sales are mostly driven to new games. Can Zynga keep coming up with new hits over and over? Sure, companies such as Electronic Arts and Activision Blizzard have a similar dependance but I would argue that their users are much more “loyal” as they spend a significant amount to buy console games. Another reason is that competitors are finally moving to platforms such as Facebook. In fact, Electronic Arts has had a lot of success launching the Sims game with over 60 million users already!
Just take a look at this chart and you get an idea of how vulnerable Zynga looks like! As for comparing growth in earnings, I do think that the chart looks bad but a big part of that is:
- Zynga having a letdown in revenues and many “one time” costs (resulting in a 95% profit decline for its latest quarter).
- Electronic Arts and Activision had very solid improvements to their margins.
Zynga is also much more reliant on one company (Facebook, which is collecting 30% of its sales) than the two others could probably ever become.
Does the fact that several executives are leaving the big companies for Zynga give any indication? I would think that it is clearly a good sign for Zynga.
Conclusion On Zynga?
While I continue to like Zynga, doing this research about valuation certainly concerns me. It’s rather difficult to make the case that Zynga is worth more or as much as a combination of Electronic Arts and Activision. They are certainly better positioned to profit from this new “genre” of games and that is significant. I am still a believer in Zynga but will have to think about its valuation once the official number is released. Hopefully by then we can get more data on Zynga. How about you?
