IPO Preview: Zynga

| About: Zynga (ZNGA)
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Based in San Francisco, California, Zynga (NASDAQ:ZNGA) scheduled a $925 million IPO with a market capitalization of $6.5 billion at a price range mid-point of $9.25 for Friday, December 16, 2011.

11 IPOs to raise $3.5 billion week of December 12, includes Zynga. See the full IPO calendar.


ZNGA should pop on the IPO so get as much as you can then sell it ASAP.


  • At the recent road show in Boston ZNGA’s CEO said “ZNGA could double paid users after IPO”
  • That information is not in the S-1 filing and the SEC should require the recent roadshow information to be in the written S-1 filing. ZNGA’s IPOs might be (should be) delayed as a result. Read more


Founded in 2007 ZNGA teamed with Facebook to create an online gaming sensation. Last summer there was talk of ZNGA IPO'ing at a $14 billion valuation, rather than today’s $6.5 billion valuation.

See our earlier Seeking Alpha articles about Zynga:

"Zynga Is Going To Have A Hard Time Justifying Its $14 Billion Valuation,"


"All Is Not Well With Zynga."


  • Loyal, dedicated user based of paying players
  • Significant brand recognition
  • Lots of money going into development of new games
  • Social gaming market expected to double form 2011 to 2014


  • ZNGA currently is a one trick pony with 94% of revenue coming from Facebook credits
  • Tiny percent of users actually pay, and that base seems fairly stable, and not necessarily growing
  • ZNGA is only 4 years old and exploited what is now recognized as a clear vacuum at the time, in terms of Facebook’s need for social online gaming solutions
  • ZNGA needs a constant flow of hits -- in a market getting more & more competitive – to succeed long term


  • Only 2.2% of ZNGA’s monthly unique users are payers, and the number is relatively stable in the 3 to 3.4 million range
  • In the June quarter relative to the March quarter -- payers declined by 9%
  • In the September quarter relative to the June quarter -- payers increased only 2%
  • Quarterly bookings per payer are relatively stable in the $69 to $73 range. ZNGA defines bookings as the total amount a player would purchase over the lifetime of the Facebook credit


In the social gaming sector, ZNGA is unique. However, broadly defining the gaming business, we can compare ZNGA to Electronic Arts (ERTS) and to Activision Blizzard (NASDAQ:ATVI).

Profitable, relatively low price-to-book value

Comparing ZNGA with Electronic Arts (ERTS) and Activision Blizzard, will sell for a premium in terms of price/sales with ERTS and ATVI, in the same range in terms of price/earnings with ERTS. ZNGA’s price/book is in the same range as ERTS and ZNGA’s price/tangible-book-value is in the same range as ATVI.

Groupon (NASDAQ:GRPN) and Angie’s List (NASDAQ:ANGI) comparisons

We believe in the current market IPO trading market an interesting comparison is with recent IPOs Groupon and Angie’s List – both of whom jumped up from their IPO price, then broke the IPO price on the way down, then recovered. As of Tuesday, December 13 GRPN is up 17% and ANGI is up 29% from their respective IPO prices.

At least ZNGA is making money and plans to sell at a substantial price-to-book-value discount relative to GRPN and ANGI.


ZNGA is the world’s leading social game developer with 232 million monthly average users in 166 countries. ZNGA has launched the most successful social games in the industry in each of the last three years and have generated over $1.5 billion in cumulative bookings since inception in 2007.

ZNGA games are accessible on Facebook, other social networks and mobile platforms to players worldwide, wherever and whenever they want. ZYNA operates games as live services and continually enhances them by adding new content and features.

All of ZNGA’s games are free to play, and ZNGA generates revenue through the in-game sale of virtual goods and advertising.


Facebook delivers more than 94% of ZNGA’s gross revenues. The games are free but players purchase virtual items from ZNGA to enhance their gaming experience.

To do so players must use a form of virtual currency called “Facebook credits.” Facebook keeps 30% of this revenue and delivers the remaining 70% to ZNGA.


Most social games are free to play and generate revenue through the in-game sale of virtual goods. According to In-Stat, a market intelligence firm, the worldwide market for the sale of virtual goods was $7.3 billion in 2010 and is expected to more than double by 2014.

Compared to pay-to-play business models, the free-to-play approach tends to attract a wider audience of players, thereby increasing the number of players who have the potential to become paying users. By attracting a larger audience, the free-to-play model also enables a higher degree of in-game social interaction, which enhances the game experience for all players.


On Facebook & other social networks

Competitors on Facebook include Crowdstar, Inc., Electronic Arts Inc., The Walt Disney (NYSE:DIS), Vostu, Ltd. and wooga GmbH. Because ZNGA’s games are free to play, ZNGA competes primarily on the basis of player experience rather than price.

ZNGA could face additional competition if large companies with significant online presences, such as Amazon.com (NASDAQ:AMZN), Facebook, Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Tencent Holdings Limited (OTCPK:TCEHY) and Yahoo (YHOO), choose to enter or expand in the social games space or develop competing social games.

GameDevelopers for Mobile

The mobile game sector is characterized by frequent product introductions, rapidly emerging mobile platforms, new technologies and new mobile application storefronts.

Competitors in the mobile game market include Electronic Arts, DeNA Co. Ltd., Gameloft, Glu Mobile, Rovio Mobile Ltd and Storm8, Inc. ZNGA expects new mobile-game competitors to enter the market and existing competitors to allocate more resources to develop and market competing games and applications.

Other Game Developers

ZNGA players also play other games on PC and consoles, some of which include social features that compete with ZNGA’s social games and have community functions where game developers can engage with their players.

Some of these competitors include Activision Blizzard, Inc., Big Fish Games, Inc., Electronic Arts, SEGA of America, Inc., THQ (THQI) and The Walt Disney Company.

Other Forms of Media and Entertainment:

ZNGA competes more broadly for the leisure time and attention of players with providers of other forms of Internet and mobile entertainment, including social networking, online casual entertainment and music.


Of $899 million

  • $84 million to satisfy tax withholding employee obligations
  • Balance for working capital and capital expenditures

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.