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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 steadily increase, reaching close to 175 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 its current and older games. However, if the figure declines to 120 million instead, there can be 15% downside to our price estimate. There can be upside of similar order if the figure reaches 230 million instead.
- 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. For 2013, we estimate that the game's monthly active users stood at around 32 million. Given the recent weakness, we forecast this figure to increase to just around 43 million by the end of the forecast period. However, if the user base declines to around 25 million by the end of the forecast period, there could be a 5% downside to our current price estimate.
Social games are generally web based games that use a variety of social platforms such as Facebook, Google+ 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.
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. Zynga also operates Zynga.org which supports different philanthropic causes by utilizing the power of virtual social goods.
Dominant social gaming website
Zynga had around 171 million average monthly active users in 2013. 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.
Growth in international markets
Growth in Internet connectivity and the increase in use of social network 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 in the region.
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 $1.5 billion of net cash, 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 games to its user for free. 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.
Zynga focusing on mid core and real money gaming
The company expects its mid-core games to keep users engaged for longer periods of time. A mid-core game tries to combine the engagement level of a core game with the learning curve of a casual game, to provide an engaging gaming experience to a larger user base. This can potentially allow for retention of a large user base while promoting in-game purchases as the games are designed to be more engaging and users are likely to pay to upgrade, rather than drop off once the free-play scenarios are completed. Zynga launched Battlezone in early 2013, which marks its foray into action RPG (role playing game).
Zynga has also rolled out real-money games ZyngaPlusPoker and ZyngaPlusCasino in the U.K. The online gambling market outside the U.S. is worth more than $32 billion and Zynga can make a big difference to its business if it can tap this market successfully. However, the company will have to deal with the competition from gaming incumbents such as Caesars Entertainment, which already operates online gambling services in Europe, and has bought social and mobile game maker Playtika.
Due to lack of federal legislation, gambling is being introduced state-by-state in the U.S. However, Zynga has dropped its plans of pursuing a license in the country.
Reducing reliance on Facebook
Zynga has been actively reducing its dependence on Facebook for quite some time. The relationship between the two companies can be described as complicated at best. In Q1 2013, Zynga removed the requirement of Facebook login in order to access games on its own website. The move comes a year after the company launched its own platform for third party game developers. A significant portion of our price estimate relies on the expectation that Zynga will continue to launch successful games. One way to ensure this is marketing third-party games, which is what the company has been doing for a while.
Revenue concentration in games
Certain games such as FarmVille, FarmVille 2 and Texas HoldEm Poker contribute the bulk of the revenues for Zynga as they represent majority of its total daily active users (DAU). High dependence on certain games can potentially be a risky strategy for social gaming companies.
Increasing penetration of social networks
We believe that there is still room for social networking phenomenon to grow. While Facebook has over 1 billion active users, the reach of other social networks such as Google+ is much lower. Even Facebook is yet to make an impact in certain parts of the world. Zynga can leverage this potential growth of social networking platforms and promote its new and existing games.
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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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