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Investment Overview for Zynga (NASDAQ:ZNGA)
Share Count Dilution
Our Trefis price estimate for Zynga is based on the diluted share count, which accounts for outstanding stock options, warrants and restricted stock. This means that the Trefis price estimate for Zynga is lower than it would be if we had used the actual share count instead.
New & Other Games
- Average Monthly Active Users:
We currently forecast the number of average monthly active users of Zynga's new games to steadily increase, reaching more than 250 million by the end of the forecast period. We expect Zynga's new games to attract users and compensate for the decline in the user base of Zynga's current and older games.
However, if Zynga's new games have only around 200 million users by the end of the forecast period, there could be a downside of about 10% to our Trefis price estimate.Conversely, if Zynga's new games take off, and its monthly active user base increases to about than 320 million users, there could be an upside of about 10% to our Trefis price estimate for Zynga.
Texas HoldEm Poker
- Average Monthly Active Users:
Texas HoldEm Poker is one of Zynga's oldest games, and one of its most valuable ones. It has continued to attract more users over the years. It currently has around 35 million monthly active users. We expect its active user base to expand to around 40 million by the end of the forecast period. However, if it fails to attract more users due to increased competition, and its user base declines to around 25 million by the end of the forecast period, there could be a 10% downside to its current Trefis price estimate.
Marketing, Advertising & Operational Expenses
- SG&A as a % of Revenue:
We currently expect Zynga's selling, advertising and operational expenses (SG&A) to increase from around 23% in 2012 to 34% by the end of the forecast period. Given the increasing competition in the social gaming space, Zynga may have to spend much more to market and advertise its games going forward. It may also have to ramp up its operational expenses if it wants to expand at a faster pace.
If its SG&A expenses as a percentage of revenues increase to more than 37% by the end of the forecast period, there could be a downside of about 10% to our Trefis price estimate.
Research & Development Expenses
- R&D as a % of Revenue:
We currently expect Zynga's research and development expenses (R&D) to stay constant at around 35% till the end of the forecast period. Given the increasing competition in the social gaming space, Zynga may have to spend much more on research and development, to continue developing new and innovative games in order to attract users.
Social games are generally web based games that use a variety of social platforms such as Facebook and MySpace 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.
Zynga was founded in 2007 with a mission to "connect the world through gaming". Zynga creates free for all social games like FarmVille, CityVille, and Texas Holdem Poker. Zynga provides its games for different platforms like Facebook, MySpace, iPhone, Yahoo, and now Google+.
Millions of people login to these platforms to play Zynga games, interact with their friends and buy in-game items and virtual goods. Zynga also operates Zynga.org which supports different philanthropic causes by utilizing the power of virtual social goods.
Zynga announced its new social gaming platform - Zynga Direct. It will be making all its games available on the new platform, in order to reduce its dependence on other platforms like Facebook or Google+. It also intends to allow other developers to launch games on its platform eventually, which could lead to a sizable new revenue stream in the future.
Dominant social gaming website
Zynga is currently the largest social gaming company with around 300 million monthly active users and around 56 million daily active users as of December 2012. Electronic Arts, had 60 million monthly active users and around 12 million daily active users and Playdom had 20 million monthly active users and around 3.5 million daily active users during the same time frame.
Apart from leading the internet in active users, Zynga's popularity is highlighted by the fact that
- Currently, 4 of the top 5 games on Facebook are made by Zynga, even though it does not retain the top spot anymore
- Zynga's games are played by more daily active users than the next 5 social game developers combined.
Growth in international markets
Growth in internet connectivity and the growing use of social network internationally has enhanced the appeal of social gaming globally. In countries such as China, the appeal of social gaming has already been quite strong. Zynga acquired social gaming company XPD Media in China in 2010 as a way to expand its presence globally and tap international markets where social gaming has done so well
Key competitive advantages to ensure growth
Zynga has become the web’s most dominant social gaming website. Some of their key competitive advantages are:
- Strong capital position
- According to the firm’s website, Zynga has raised over $219 million in funding from a variety of venture capital investors. In February 2011, the firm supposedly raised close to $500 million at a valuation of nearly $10 billion.
- Marketing advantage
- Zynga’s huge gaming audience enables it to market games to its user for free. New game developers often have marketing budgets of 50% of the cost of developing the game. Zynga’s strong user base and Monthly Average Users (MAU) will continue to give it a marketing advantage over their peers
- Ability to imitate games
- Several of the most popular games currently on Zynga are similar in nature and concept to those launches by other companies. Zynga’s largest game, FarmVille, is similar to Farmtown which was launched earlier. Having a strong development team of more than 1500 individuals enables the firm to operate in a competitive way and produce high quality games that will attract more users.
Decline in pace of growth
While Zynga’s growth may have been quite strong in 2010,2011 and 2012, the firm Monthly Average Users (MAU) is likely to slow going forward as a result of the slowing growth of popular social network site, Facebook and increased competition from other competitors who have been attracted by the large profits that social games have generated in recent times.
Heavy dependence on Facebook
Zynga generates a major portion of its revenue from Facebook. In 2011, it generated over 95% of its total revenue from games on Facebook. Going forward, we expect it to generate increasing amounts of revenue from other platforms like iOS, Android, Google+, and Zynga Direct, but Facebook is expected to remain its primary revenue engine in the near future.
Revenue concentration in games
Certain games such as FarmVille, CityVille, and Empires & Allies contribute the bulk of the revenues for Zynga as they represent nearly 60% of the total Daily Active Users (DAU). Dependence on certain games for high revenue generation can potentially be a risky strategy for social gaming companies.
Social network penetration
While the social networking phenomenon may have spread to most parts of the world, it still is behind in terms of the potential reach.
The reach of other social networks like MySpace and Google+ is much lower. This clearly indicates the potential for growth. Social networking phenomenon, Facebook has yet to make an impact in certain parts of the world. With the growth of Facebook and other platforms, Zynga has a good chance to get a boost in growth.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- 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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