Five and a half months after filing their S-1 with the SEC, Zynga Inc. (ZNGA) will finally make their public debut on the Nasdaq Friday morning. The company priced their 100 million share IPO at $10.00, the high end the indicated range of $8.50-10.00. All of the shares are being offered by the company, which intends to use the proceeds for general corporate purposes, including working capital, game development, marketing and capital expenditures. Based on the $10.00 pricing, the company will have a market capitalization of approximately $6.99 billion (closer to about $8.5-$9 billion on a fully diluted basis when including stock options, restricted stock units and warrants).Morgan Stanley and Goldman Sachs are leading the offering.
Zynga is a leading social game developer, creating 9 of the top 10 biggest social games, including names like Farmville, Cityville, Café World, and Words with Friends. As of September 30, 2011 they their games held 4 of the five top games on Facebook, with monthly active users (MAUs) greater than the next 8 competitors combined (and 3x larger than the closest competitor EA Sports whose Sims Social game was # 3 on the list).
The company has 227 million active users, 54 million average daily users and about 7.7 million unique paying players. While the games are free to play, they monetize through the selling of virtual goods and advertising. Currently virtual goods make up 95% of their revenue, with advertising representing only 5%. However, they are in early stages of advertising revenue and the growth looks very promising according to the company.
The company has experienced rapid growth since inception, and revenue has grown from $19.4 million in 2009 to $597 million in 2010. For the first 9 months of 2011 revenue is up 106% year over year to $829 million. More importantly, the company is profitable, unlike recent internet/social companies who have gone public this year such as LinkedIn (LNKD) (which was slightly profitable in 2010 but is dipping back into the red in 2011 due to their aggressive growth), Groupon (GRPN) and Angie’s List (ANGI). Zynga had net income of $90.6 million in 2010, and though net income is down year over year for the 9 months 2011, it is still positive to the tune of $30.7 million, despite heavy investment in their platform, games and team over the last year (of about $500 million).
There has been much said about Zynga’s heavy reliance on Facebook, which represents a majority of their revenue, and that it is a huge risk for the company going forward. However, the two companies recently extended their contract and with the large amount of Facebook users spending a great deal of time playing Zynga games, it could just as easily be argued that it would be foolish for Facebook to end the relationship.
While Zynga operates in a highly competitive market, they have been able to achieve incredible growth and traction in a short amount of time. While a gaming company is only as successful as their next hit, they have been able to produce a relatively large number of hits over their short history, and they have said that their pipeline of games in development is the largest in their short history. Recent high profile offerings of internet/social companies (mentioned above LNKD, GRPN and ANGI) have had very robust demand and successful day one performance on their IPO debuts (though relatively mixed and volatile after day one) and Zynga looks to follow suit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I may initiate a long position in ZNGA within 72 hours.