Why Zynga Is Worth $14

by Trefis Team
+13.99%
Upside
9.02
Market
10.28
Trefis
ZNGA
Zynga
Rate   |   votes   |   Share

Zynga (NASDAQ:ZNGA) is the world’s largest social gaming company with around 270 million monthly active users. Its most popular offerings include FarmVille, CityVille, Texas HoldEm Poker and Mafia Wars. It is much larger than any of its competitors and has an active user base which is larger than the next 5 social gaming companies combined. It competes primarily with Electronic Arts (NASDAQ:EA), Playdom which was recently acquired by Disney (NYSE:DIS) and other independent social gaming studios.

We currently have a $14.20 Trefis price estimate for Zynga, which stands nearly 130% above its market price, which recently hit a new low following its secondary offering and Facebook’s plummet post-IPO.

Check out our complete analysis of Zynga

Here’s why we think Zynga is much more valuable than what the market thinks:

Mobile Gaming

Zynga has traditionally generated a major portion of its revenues through social games on Facebook, either through advertising or virtual transactions. In the last couple of quarters, it has been focusing on the rapidly growing mobile gaming space, and we expect its bets on mobile to pay off going forward.

It has already launched multiple games on major smartphone platforms, and recently acquired OMGPOP, the maker of the smash hit Draw Something, to bolster its mobile gaming efforts. We expect it to continue churning out new mobile games connected with a common social layer. Its large user base gives it the kind of scale that no other game developer has. It is also in a position to leverage its existing user base to cross-market its new games and quickly gain enough momentum to reach the top of the app/game leaderboards of the respective app stores.

We expect the mobile gaming frenzy which is expected to be amplified by the rising global smartphone penetration to drive Zynga user growth going forward, as Zynga continues to launch new games to attract additional users. You can check out the impact of new user additions on its value using this chart:

Online Gambling

Zynga has announced its intentions to enter the online gambling space and launch real-money gambling games in the coming years in order to cash in on the very lucrative online gambling space which may be opened up in the coming months. It is apparently in talks with Wynn and is expected to make a move soon. Since the average player spend in online games is much higher than in social games, this could significantly boost Zynga’s revenues in the coming years, if Zynga plays its cards right (no pun intended).

Zynga is currently best positioned to enter the online-social gambling space, as its Texas HoldEm Poker is the most popular game in the casino genre. It has also launched a couple more casino themed games like Bingo and Slingo, and is on track to launch some other popular casino titles. It already has the technology and the infrastructure, and could launch real-money versions of these games quickly, once it is done with the paperwork.

You can check out the impact of any increase in its average revenue per user in casino themed games due to its foray into online gambling using this chart:

Zynga Platform

Earlier this year, Zynga launched its own gaming platform and cloud infrastructure — the Zynga Platform — in a bid to reduce its dependence on Facebook and to generate additional revenue by hosting and marketing games by other developers. It has already started marketing games by other studios, and could become the default cloud gaming platform, thanks to the scalability and immense marketing reach it offers, and become a potential goldmine for Zynga.

These are the three potential growth drivers for Zynga going forward. Besides these, there is Zynga’s current cash cow – social games – which is expected to continue to keep generating increasing amounts of revenue going forward.

This is why we believe that Zynga’s best years lie ahead, and there’s still tremendous upside potential to the stock.

Understand How a Company’s Products Impact its Stock Price at Trefis

 

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Zynga Logo
  • commented 10 years ago
  • tags: ZNGA ZYNGA FB DIS
  • Having reviewed 1000s of equity valuations in my career - I was shocked by this valuation both in terms of structure and outcome. The attempt to place an income stream on a per-game basis - and then accumulate value, is a break-up analysis which has no business in discussing a newbie IPO flushed with post-teens millionaires - Zynga is not valued by a sum-of-the-parts - and these "parts" are fad-games which will rise/fall like the tides - naturally a real analysis would be based on cashflow and net income - but projecting Zynga's financial future is pure gambling at this stage. The only basis for this approach is the assumption that Zynga will never produce a stable earnings stream and therefore will be bought out by EA, Sony, MSFT etc...but that would only happen after the stock crashed to $3-4 and would be bought out around current levels or possibly a $1 or 2 higher. Here is reality - Zynga is an option on the growth of social gaming - but they are up against companies that are fierce competitors and each have 10-50x Zynga's financial position. Look for quarter-to-quarter earnings to be erratic and stock to trade $4-5 and be bought out at $7 range - yes the stock will likely trade up over $10 before the Street gets education here - so there is a trade. But the REAL issue driving Zynga stock is not even mentioned - which is the fate of FB and its loathsome IPO - if I was Zynga - I would be de-coupling my business model off of FB hopefully faster than users move on - as long as FB remains a dog - then Zynga will be the fleas on the dog - both companies are acting like teenagers on a spending spree - and EPS models for both are hopeless, self-serving speculation - sell FB - don't buy ZNGA....
    Zynga Logo
  • commented 10 years ago
  • tags: ZNGA ZYNGA FB DIS
  • Having reviewed 1000s of equity valuations in my career - I was shocked by this valuation both in terms of structure and outcome. The attempt to place an income stream on a per-game basis - and then accumulate value, is a break-up analysis which has no business in discussing a newbie IPO flushed with post-teens millionaires - Zynga is not valued by a sum-of-the-parts - and these "parts" are fad-games which will rise/fall like the tides - naturally a real analysis would be based on cashflow and net income - but projecting Zynga's financial future is pure gambling at this stage. The only basis for this approach is the assumption that Zynga will never produce a stable earnings stream and therefore will be bought out by EA, Sony, MSFT etc...but that would only happen after the stock crashed to $3-4 and would be bought out around current levels or possibly a $1 or 2 higher. Here is reality - Zynga is an option on the growth of social gaming - but they are up against companies that are fierce competitors and each have 10-50x Zynga's financial position. Look for quarter-to-quarter earnings to be erratic and stock to trade $4-5 and be bought out at $7 range - yes the stock will likely trade up over $10 before the Street gets education here - so there is a trade. But the REAL issue driving Zynga stock is not even mentioned - which is the fate of FB and its loathsome IPO - if I was Zynga - I would be de-coupling my business model off of FB hopefully faster than users move on - as long as FB remains a dog - then Zynga will be the fleas on the dog - both companies are acting like teenagers on a spending spree - and EPS models for both are hopeless, self-serving speculation - sell FB - don't buy ZNGA....