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Investment Overview for Zynga (NASDAQ:ZNGA)
Farmville, Farmville2 and Other Games
- Average Monthly Active Users: We currently forecast the number of average monthly active users for Zynga's other games (except Poker) to decrease in the near-term, in line with the trend seen over the last two years, and then stabilize over our forecast period. We expect Zynga's new games to attract users and compensate for the decline in the user base of its current and older games. However, if the figure declines to 60 million, there can be 20% downside to our price estimate. There can be upside of similar order if the figure reaches 140 million instead.
- Average Monthly Active Users: Texas HoldEm Poker is one of Zynga's oldest games, and one of its most valuable ones. In 2014, we estimate that the game's monthly active users decreased to around 27.2 million. The new Poker game launched by Zynga in H2 2014 hit a road-bump as some users missed the design of the older version, and the new game failed to run properly on some older devices. Given the recent weakness being seen in the Zynga's Poker business, we expect its user base to remain broadly the same over our forecast period. However, if the user base increases to around 30 million by the end of the forecast period, there could be a 5-10% upside to our current price estimate.
Social games are generally web based games that use a variety of social platforms such as Facebook and Google+ to enable gaming interaction. The features that make social gaming attractive include the ability to track how well an individual’s friends and other people within the community are doing, and the ability to have multiple players engaged at any point in time if needed. The social aspect of these games makes gaming more addictive and viral, thereby attracting more users.
Founded in 2007, Zynga creates free social games such as FarmVille, Farmville2 and Texas HoldEm Poker. The company provides its games for different platforms including Zynga Direct, Facebook, MySpace, iPhone, Android and Google+.
Millions of people login to these platforms to play Zynga games, interact with their friends and buy in-game items and virtual goods.
Dominant social gaming website
Zynga had around 118 million average monthly active users in 2014. Its competitors Electronic Arts and Playdom have a smaller active user base. Apart from leading the Internet in terms of total number of active users, Zynga's popularity is highlighted by the fact that many of its games rank among top social games on Facebook consistently.
Zynga has become the web’s most dominant social gaming website. Some of its key competitive advantages are:
- Strong capital position
- Zynga currently has close to $1.2 billion of net cash (as of December 31, 2014), which constitutes a major chunk of the company's value as per our estimates.
- Marketing advantage
- Zynga’s huge gaming audience enables it to market new games to its existing users at low costs. New game developers often have marketing budgets of 50% of the cost of developing the game.
- Ability to imitate games
- Several of the most popular games currently on Zynga are similar in nature and concept to those launched by other companies. Zynga’s largest game, FarmVille, is similar to Farmtown which was launched earlier. Having a strong development team individuals enables the firm to operate in a competitive way and produce high quality games that will attract more users.
Evergreen gaming categories will be targeted by Zynga for growth in 2015 and beyond
Zynga aims to launch 6-8 new games in highly-popular gaming categories (such as action-strategy, Social Casino and Racing) during 2015 to bolster its business through the year. A number of new titles such as FarmVille Harvest Swap are currently being tested in certain markets, and will be launched globally during the second half of 2015. In addition, NaturalMotion’s new game Dawn of Titans will also be released later this year.
Reducing reliance on Facebook
Zynga's dependence on Facebook has come down over the past few years due to the complicated relationship between the two companies. The share of Facebook in Zynga's overall bookings has reduced from 69% in 2013 to 43% in 2014, and we expect this figure to further drop in the future. Facebook recently rolled out an advanced version of its developer platform and publishers are required to migrate to the new platform soon. Zynga has decided not to migrate ten of its existing games to this new platform.
Revenue concentration in games
Certain games such as FarmVille, FarmVille 2 and Poker contribute for the bulk of the revenues for Zynga as they represent majority of its total daily active users (DAU). The share of the three top games in the company's overall online gaming revenue was recorded at 54% and 60% in 2013 and 2014 respectively. High dependence on certain games can potentially be a risky strategy for social gaming companies.
Mobile business is picking up
Even though Zynga’s PC business is stumbling, owing to its changing relationship with Facebook, its mobile business is showing promising trends. Mobile bookings rose by 84% year-over-year during the first quarter of 2015, to comprise for 63% of the total bookings. In comparison, web bookings dropped by 33% year over year and 15% quarter over quarter. While mobile monthly active users (MAUs) rose by 8% sequentially, web MAU’s fell by 26% during Q4 2014. The successful launch of games including New Words With Friends and Looney Tunes Dash! helped drive the strong performance on mobile platform.
Recent Cost Cutting Measures Could Drive Margins Higher
Zynga recently announced a new cost cutting initiative under which it will cut around 18% of its workforce (comprising 364 employees) and will reduce spend on outside and centralized services. While the annualized savings from the workforce reduction program is estimated at about $45 million, the same from the cutback in centralized services is forecast to be higher at $55 million. The company plans to complete the workforce reduction program by the end of this year; however, the latter program could took longer and is slated for completion by Q3 2016. We expect these cost cutting measure along with top-line growth to result in increased margins in the future.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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