Zynga New Coverage: $10.34 Pre-IPO Trefis Price Estimate

9.50
Trefis
ZNGA: Zynga logo
ZNGA
Zynga

Zynga (NASDAQ:ZNGA) is the world’s largest social gaming company. Founded in 2007, the company has launched social games such as FarmVille, CityVille and Texas HoldEm Poker as well as many others on social networks like Facebook and Myspace. It currently has close to 220 million monthly active users and around 54 million daily active users worldwide. The firm has an active user base that is greater than the next 5 social gaming companies combined. It competes primarily with other gaming companies like Electronic Arts (NASDAQ:ERTS) and Disney (NYSE:DIS) which recently acquired Playdom as well as companies like Activision Blizzard (NASDAQ:ATVI) that are trying to gain a foothold in the burgeoning social gaming market. There are also a hosts of smaller social gaming developers like Playdom, 6waves and Lolapps.

The firm makes money primarily by selling in-game virtual goods to its users. It reported revenues of $597 million in 2010, and we expect this to reach $1 billion in revenues by the end of 2011.
Zynga has grown astronomically over the last few years since its launch both as a result of organic growth as well as acquisitions. It has acquired about 14 social gaming companies so far, including XPD, Challenge Games, Unoh Games, Conduit Labs, Dextrose AG, Bonfire Studios, Newtoy and Flock.

We currently have a $10.34 Trefis price estimate for Zynga. This pre-IPO valuation takes into account substantial option dilution, which adds an additional 250 million shares to the basic share count of 600 million pre-IPO. We have not incorporated the proceeds from the IPO or new share count and will update this when the deal is finalized.

Relevant Articles
  1. What’s New With Zynga Stock?
  2. What’s Happening With Take-Two Interactive Stock?
  3. What’s Happening With Zynga Stock?
  4. What To Expect From Zynga’s Q4?
  5. Take-Two Interactive To Acquire Zynga
  6. What’s Happening With Zynga Stock?

Zynga’s Major Revenue Drivers

We have broken down Zynga into 6 different divisions which drive Zynga’s value.

New Games to Drive Zynga’s Revenues Going Forward

Zynga has had several hit games since its inception. Texas HoldEm Poker and Mafia Wars were its first successful games, but FarmVille later became the game that dominated headlines. At its peak, FarmVille had more than 80 million monthly active users though this number has declined. After FarmVille, Zynga launched other hits like CityVille which currently has close to 50 million monthly active users. Its latest major launch was CastleVille that has around 20 million users monthly.

Like many gaming companies, Zynga’s games follow a life cycle that where of its new games see a huge jump in player numbers once launched due to Zynga’s aggressive marketing and cross-promotions in other games, but as time passes, the player numbers in the older social games gradually drop off as players move on to play newer games released by Zynga and its competitors. The cycle continues, and as a result, newer games account for a major portion of its future revenues.

Given this behavior, this is why our analysis includes a “New & Other Games” division, which includes all other games than the 5 most important ones detailed in our analysis. Our analysis then forecasts the average number of players per month for these other games, which we believe is around 70 million now and will grow to around 300 million by the end of our forecast period.

Based on available data about genre specific ARPU numbers for various games and Zynga’s reported financials, we estimate that the Average Revenue Per User for New & Other Games to be $0.16 in 2010. We expect this metric to increase to $0.27 in 2011 and continue to increase gradually throughout the Trefis forecast period.

Texas HoldEm Poker

Texas HoldEm Poker is one of the exceptions which bucks the general trend. It is one of Zynga’s oldest games and currently has around 30 million active users.

It continues to attract new users and has a high user retention rate thanks to its inherently addictive nature and timelessness. We expect it to continue to show a steady growth in active users throughout the forecast period. As one of the most popular Poker games, it also has a much higher ARPU than other Zynga games, which makes it one of Zynga’s most profitable games accounting for nearly 30% of Zynga’s Trefis price estimate.

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