Wednesday, June 29, 2011

Zynga Could File for IPO as Early as Today

Of the "Big 4" proposed "web 2.0" IPOs - Facebook, Zynga, Twitter, and Groupon* - only the former 2 are showing the potential of big gains in profits at this time.  Not that it will necessarily matter when they come public in a country starving for high growth stories.  While I like Zynga the company, Zynga the proposed valuation is already troubling.  Riding the back of Farmville, the bankers are proposing bringing this name out at $15-$20B.  At the latter price point, Zynga would be worth as much as Electronic Arts (ERTS) and Activision (ATVI) COMBINED.  (Those 2 companies have revenue of $8B+ versus under $1B for Zynga)

And we know whatever the IPO price is, the stock will jump 30-50%+ on day one, so Zynga will certainly surpass the 2 giants in the video game market combined.  At these price points this looks like a name that in the short run is going to be a winner for insiders, and those granted shares by the investment bankers - and a lot more difficult investment for the retail crowd which will be paying sky high premium once the name publicly trades.  Reid Hoffman (CEO of LinkedIn) and Peter Thiel look to be "winning" again with Zynga.

Once more amazing wealth being created - Groupon is about 3 years old and asking for similar valuation, Zynga is 4 years old.... we're talking $40-$50 billion in valuation among the two.  

Via WSJ:

  • With Internet valuations surging and bankers circling Silicon Valley, online-games maker Zynga Inc. is preparing to test investors' appetite for an initial public offering that values the young company as high as $20 billion.  That would be double the price tag the San Francisco start-up, which makes "FarmVille" and other simple games played on Facebook's website, fetched just a few months ago when it sold shares to venture capitalists.
  • But since then, several Web companies have raised money at eye-popping valuations. Others have filed for multi-billion dollar IPOs. Shares of LinkedIn Corp. gained 80% its first day of trading last month, and the professional social network now sports a market value of $8 billion. Groupon Inc., which has racked up losses, has filed for an initial public offering that could value the online coupon site at more than $20 billion.
  • Zynga expects to raise as much as $2 billion in its IPO and it could file its paperwork as early as Wednesday, said people familiar with the matter.
  • That could value the game publisher, which had about $850 million in revenue last year, at roughly the same as the two biggest videogame publishersElectronic Arts Inc. and Activision Blizzard Inc.—combined.
  • The rush of Web IPOs, coupled with a frothy start-up investment environment in Silicon Valley, has fomented fears that the Internet sector is reaching a frenzied level not seen since the late 1990s dot-com bubble.
  • Unlike LinkedIn and Groupon, however, Zynga is expected to generate a profit this year. Nitsan Hargil, an analyst at GreenCrest Capital Management LLC, a research firm that analyzes private companies, estimates Zynga will have revenue of nearly $1.5 billion this year and be profitable. 
  • Founded four years ago by Internet entrepreneur Mark Pincus, Zynga offers its games free and generates revenue mostly through the sale of virtual goods—for example, a tractor that helps FarmVille players harvest crops. While the vast majority of players never spend a cent in its games, some players pay up so they can accelerate their progress in the game and enhance their status in the eyes of other players.
  • Still, Mr. Hargil says there are concerns about Zynga's dependence on Facebook. While the company has sought to diversify its business through mobile games, its greatest successes have been on the 600 million-member strong social network.  Zynga's games collectively have about 271 million active monthly players on Facebook, an audience nearly eight times the size that of the next biggest Facebook app developer, according to, a firm that tracks activity on Facebook.
  • So far, Zynga has turned its early success on Facebook into a formidable barrier to competition from other game developers. The company heavily promotes new games, like its recently released strategy game "Empires & Allies," to its huge audience of existing players, giving the company a marketing advantage its rivals lack.  "Empires & Allies" is now the second most popular app on Facebook, with about 42 million average monthly players. Zynga's "CityVille," with 88 million monthly players, is the first.

*note: Groupon is not really a web2.0 company in these eyes, but is getting thrown in with the rest.

[May 25, 2011: Sources - Zynga Ready to File for IPO]

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