IPOs, Initial Public Offerings: pre & post IPO

Zynga (ZNGA)

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BUY/AVOID RECOMMENDATION
ZYNGA will pop on the IPO so get as much as you can. We’ll let you know our after market thoughts after it starts trading.

Based in San Francisco, California, Zynga (proposed ZNGA) scheduled a $925 million IPO with a market capitalization of $6.5 billion at a price range mid-point of $9.25 for Friday, December 16, 2011.

FLASH
At the recent road show in Boston ZYGA’s CEO said “ZYNGA could double paid users after IPO”.

That information is not in the S-1 filing. The SEC should require that information to be in the written S-1 filing. ZYGA’s IPOs might be delayed as a result…read more

SUMMARY
Founded in 2007  ZYNG teamed with Facebook to create an online gaming sensation. Last summer there was talk of ZYGA IPOing at a $14 billion valuation, rather than today’s $6.5 billion valuation.

PLUSES
. Loyal, dedicated user based of paying players
. Significant brand recognition
. Lots of money going into development of new games
. Social gaming market expected to double form 2011 to 2014.

MINUSES
. ZYGA currently is a one trick pony with 97% of revenue coming from Facebook ‘credits’.
. Tiny percent of users actually pay, and that base seems fairly stable, and not necessarily growing
. ZYGA is only 4 years old and exploited what is now recognized as a clear vacuum at the time, in terms of Facebook’s need for social online gaming solutions

ZYGA’s ACHILLES HEAL
. Only 2.2% of ZYNG’s monthly unique users are payers, and the number is relatively stable in the 3 to 3.4 million range.
. In the June quarter relative to the March quarter — payers declined by 9%
. In the September quarter relative to the June quarter — payers increased only 2%
. Quarterly bookings per payer are relatively stable in the $69 to $73 range. ZYGA defines bookings as the total amount a player would purchase over the lifetime of the Facebook credit.

Dec’09

March ’10

June ’10

Sept ’10

Dec ’10

March ’11

June ’11

Setp’11

UNIQUE PAYERS

1,903

2,330

2,577

2,754

3,027

3,676

3,336

3,407

in millions

1.9

2.3

2.6

2.8

3.0

3.7

3.3

3.4

qtr change in # of payers

22%

11%

7%

10%

21%

-9%

2%

BOOKINGS per unique payer

$69

$71

$68

$72

$71

$69

$70

$73

qtr change in $ bookings/payer

3%

-4%

6%

-1%

-3%

1%

4%

% of payers per MUU

1.7%

1.9%

2.2%

2.5%

2.7%

2.5%

2.2%

2.2%

(Monthly Unique Users)

.
VALUATION

In the social gaming sector, Zynga is unique. However, broadly defining the gaming business, we can compare ZYNGA to Electronic Arts (ERTS) and to Activision Blizzard.(ACTI)

Profitable, relatively low price-to-book value
ZYGA will sell for a premium in terms of price/sales with ERTS and ATVI, in the same range in terms of price/earnings with ERTS. ZYNG’s price/book is in the same range as ERTS and ZYNG’s price/tangible-book-value is in the same range as ATVI.

Compare & Contrast

IPO Mrkt

Price /

Price /

Price /

Price /

Stock

Annualizing Sept 9 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

YTD

Zynga (ZNGA)

$6,466

5.9

156

4.1

4.4

Electronic Arts (ERTS)

$7,120

2.0

178

2.9

20.3

29%

Activision Blizzard (ATVI)

$13,720

3.1

10

1.3

5.0

-4%

.
Compares favorable with recent IPOs Groupon (GRPN) and Angie’s List (ANGI)
We believe in the current market IPO trading market a better comparison is with the recent IPOs Groupon (GRPN) and Angie’s List (ANGI) – both of whom jumped up from their IPO price, then broke the IPO price on the way down, then recovered. As of Friday, December 9 GRPN is up 13% and ANGI is up 20% from their respective IPO prices.
.

Compare & Contrast

Mrkt

Price /

Price /

Price /

Price /

Price chg

Annualizing Sept 3 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

from IPO

Zynga (ZNGA)

$6,466

5.9

156

4.1

4.4

Groupon (GRPN)

$14,200

8.3

-14854

30.6

43.6

13%

Angie’s List (ANGI)

$898

9.4

-13

32.7

26.1

20%

.
Notice that at least ZYNA is making money and plans to sell at a substantial price-to-book-value discount to GRPN and ANGI.

BUSINESS
ZNGA is the world’s leading social game developer with 232 million average MAUs in 166 countries. ZNGA has launched the most successful social games in the industry in each of the last three years and have generated over $1.5 billion in cumulative bookings since our inception in 2007.

ZYGA games are accessible on Facebook, other social networks and mobile platforms to players worldwide, wherever and whenever they want. ZYNA operates games as live services and continually enhances them by adding new content and features.

All of ZYNGA’s games are free to play, and ZYNGA generates revenue through the in-game sale of virtual goods and advertising.

REVENUE SOURCES
Facebook delivers more than 93% of Zynga’s gross revenues. The games are free but players purchase virtual items from Zynga to enhance their gaming experience.

To do so players must use a form of virtual currency called “Facebook credits.” Facebook keeps 30% of this revenue and delivers the remaining 70% to Zynga

SOCIAL GAMING MARKET TO DOUBLE
Most social games are free to play and generate revenue through the in-game sale of virtual goods. According to In-Stat, a market intelligence firm, the worldwide market for the sale of virtual goods was $7.3 billion in 2010 and is expected to more than double by 2014.

Compared to pay-to-play business models, the free-to-play approach tends to attract a wider audience of players, thereby increasing the number of players who have the potential to become paying users. By attracting a larger audience, the free-to-play model also enables a higher degree of in-game social interaction, which enhances the game experience for all players.

COMPETITION
On Facebook & other social networks
Competitors on Facebook include Crowdstar, Inc., Electronic Arts Inc., The Walt Disney Company, Vostu, Ltd. and wooga GmbH. Because ZNGA’s games are free to play, ZNGA competes primarily on the basis of player experience rather than price.

ZYGA could face additional competition if large companies with significant online presences, such as Amazon.com, Inc., Facebook, Inc., Google Inc., Microsoft Corporation, Tencent Holdings Limited and Yahoo! Inc., choose to enter or expand in the social games space or develop competing social games.

GameDevelopers for Mobile
The mobile game sector is characterized by frequent product introductions, rapidly emerging mobile platforms, new technologies and new mobile application storefronts.

Competitors in the mobile game market include Electronic Arts, DeNA Co. Ltd., Gameloft, Glu Mobile, Rovio Mobile Ltd and Storm8, Inc. ZNGA expects new mobile-game competitors to enter the market and existing competitors to allocate more resources to develop and market competing games and applications.

Other Game Developers
ZYGA players also play other games on PC and consoles, some of which include social features that compete with ZYGA’s social games and have community functions where game developers can engage with their players.

Some of these competitors include Activision Blizzard, Inc., Big Fish Games, Inc., Electronic Arts, SEGA of America, Inc., THQ Inc. and The Walt Disney Company.

Other Forms of Media and Entertainment:
ZYGA competes more broadly for the leisure time and attention of players with providers of other forms of Internet and mobile entertainment, including social networking, online casual entertainment and music.

USE OF PROCEEDS
Of $899 million
. $84 million to satisfy tax withholding employee obligations
. Balance for working capital and capital expenditures.

Zynga ZNGA, C+, 7

Post PO shares:699mm

Internet games

Sept 9 mos

Sept 9 mos

San Francisco, CA

2008

2009

2010

2010

2011

IPO Mkt

Revenues ($mm)

$19

$121

$597

$402

$827

Cap (mm)

Gross profit %

48%

53%

71%

69%

73%

$6,466

Net income (loss)

-$22

-$53

$91

$48

$31

@$9.25

Net income (loss) % of rev

-113%

-44%

15%

12%

4%

Quarterly results

June ’10

Sept, ’10

Dec, ’10

March, ’11

June ’11

Sept ’11

Revenues ($mm)

$10.5

$12.3

$14.7

$16.1

$17.9

$20.8

Revenue increase over prior qtr

17%

20%

10%

11%

16%

Gross Profit %

55%

58%

58%

56%

55%

56%

Net loss ($mm)

-$7.2

-$7.6

-$6.8

-$14.5

-$16.1

-$7.5

Net loss % of revenue

-69%

-62%

-46%

-90%

-90%

-36%

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing Sept 9 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Zynga (ZNGA)

$6,466

5.9

156

4.1

4.4

14%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

2

1

7

Compare & Contrast

IPO Mrkt

Price /

Price /

Price /

Price /

Stock

Annualizing Sept 9 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

YTD

Zynga (ZNGA)

$6,466

5.9

156

4.1

4.4

Electronic Arts (ERTS)

$7,120

2.0

178

2.9

20.3

29%

Activision Blizzard (ATVI)

$13,720

3.1

10

1.3

5.0

-4%

Compare & Contrast

Mrkt

Price /

Price /

Price /

Price /

Price chg

Annualizing Sept 3 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

from IPO

Zynga (ZNGA)

$6,466

5.9

156

4.1

4.4

Groupon (GRPN)

$14,200

8.3

-14854

30.6

43.6

13%

Angie’s List (ANGI)

$898

9.4

-13

32.7

26.1

20%

 

 

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