×
You will be redirected back to your article in seconds

Zynga’s IPO ka-ching

Some fear high valuation is sign of Internet stock bubble

The long-awaited initial public offering for Zynga is reality — but as some investors celebrate, others wonder whether the numbers being discussed in conjunction with the company are a sign that we’re in the middle of another Internet stock bubble.

Zynga, the maker of massively popular Facebook games like FarmVille and Mafia Wars, filed for an IPO Friday and said it plans to raise $1 billion — – a figure that is expected to go higher by the time its shares begin trading.

A final IPO figure is likely to emerge in the next three to four months as bankers determine the offering price and how many shares should be sold. If high-end estimates prove true, Zynga could emerge with a valuation that’s bigger than any publisher in the video game industry.

A high valuation would come with a notably higher multiple. Gaming giant Activision has a 6X multiple, Take-Two and Ubisoft have 8X multiples and Electronic Arts comes in at 11X — all within acceptable limits for most investors.

Zynga, if it sticks with the $1 billion mentioned in the S-1 filing, will have a $10 billion valuation, giving it a multiple of 19X. If it bumps that IPO filing to $2 billion, the valuation jumps to $20 billion and the multiple soars to 46X, which some may consider high.

The 1990s Internet bubble was caused, in part, by investors and venture capitalists pouring money into companies that were never profitable — or even close. That’s not the case with Zynga. In its S-1 filing, the company reports 2010 profits of $90.6 million, with revenue hitting $597.5 million. In the first three months of 2011, it has earned $11.8 million on sales of $235.4 million.

At the end of the first quarter, Zynga games averaged 62 million daily active users. Collectively, those players spend 2 billion minutes per day interacting with the games. And the number of people playing them has increased steadily since September.

While most users of FarmVille and Zynga’s other games only play the free portions, the company said it relies on a “small percentage of players for nearly all of our revenue.” Those players pay small amounts of money for virtual items in Zynga games. It did not break out what percent of players pay.

Zynga relies on its partnership with Facebook to succeed. Zynga, in its S-1, said it makes “substantially all of [its] revenue and players through Facebook and expects to continue to do so for the foreseeable future.”

To protect future earnings, the company has been diversifying. A year ago, Google invested $100 million in the company — and many expect Zynga games to be a large part of the emerging Google Plus social network.

The company also makes money from in-game advertising.

Zynga’s rise has given many in the vidgame industry cause for concern, especially given how much time players spend with the games.

Wall St. analysts, though, say those worries are likely overstated.

“We do not see Zynga’s business as cannibalizing the packaged goods business, at least for hard core games,” said Michael Pachter of Wedbush Securities. “We think that Zynga has captured some of the ‘Guitar Hero’ and ‘Wii Fit’ crowd — primarily women — and expect the company to continue to grow the games category beyond the traditional 13-30-year-old male demographic.

“However, we do not think that Zynga’s success spells doom or failure for the traditional publishers, as we are confident that the hard core gamer is here to stay.”

The filing could benefit rival Electronic Arts. one of the few companies that has invested in social network games with its Playfish acquisition in 2009. EA shares spiked last week when talk of Zynga’s filing began to circulate — and climbed 2.5% Friday.

Disney, meanwhile, is focused on social games, but because the mouse house is divested in so many industries, Zynga’s filing isn’t expected to ping the radar of its investors.

CEO Mark Pincus founded Zynga in 2007. It employs roughly 2,300 people, mostly in San Francisco. Morgan Stanley and Goldman Sachs are leading the offering’s underwriters.

Popular on Variety

More Digital

  • United Talent Agency Reveals New Logo

    UTA Unveils New Logo, Corporate Image

    UTA raised the curtain Monday on a new corporate logo. The three-dimensional image is meant to emphasize the talent agency’s focus on uniting ideas, opportunities and talent. Building signage with the new logo will go up next month at UTA’s headquarters in Beverly Hills. “Our new identity captures the multiple facets and intersections of our [...]

  • Altice One set-top

    Amazon Prime Video Coming to Altice's Optimum, Suddenlink Cable Services

    Altice USA plans to launch Amazon Prime Video for Optimum and Suddenlink cable customers nationwide in the next few months, under a pact announced Monday. Altice is the third pay-TV operator in the U.S. with a distribution deal for Amazon Prime Video, after Comcast and Cox Communications. The cable operator is adding Prime Video to [...]

  • youtube leanback screenshot

    YouTube to Shut Down Leanback Web TV Interface on October 2

    YouTube is getting ready to retire its TV-optimized browser interface, also known as YouTube Leanback, on October 2, Variety has learned. The move comes as YouTube is putting a bigger emphasis on its native TV apps, but also represents a blow to users who directly connected their PCs to their TVs. YouTube started to inform [...]

  • Terminator: Dark Fate

    Paramount & Adobe Launch ‘Terminator: Dark Fate’ Trailer Remix Contest

    Adobe has teamed up with Paramount Pictures to launch a remix contest for the trailer of “Terminator: Dark Fate,” which is set to debut in theaters November 1. The winner of the contest will get $10,000 as well as a one-year Adobe Creative Cloud membership and a private screening of the movie for up to [...]

  • Gabrielle Carteris

    SAG-AFTRA Urges Gavin Newsom to Sign Law Punishing 'Deep Fake' Videos

    SAG-AFTRA National Executive Director David White is urging Gov. Gavin Newsom to sign legislation that institutes penalties for nonconsensual digital sexually explicit videos, also known as “deep fakes.” The legislation, Assembly Bill 602, targets companies and individuals who create and distribute the videos in California without the consent of the individual being depicted. “We urge Gov. [...]

  • Facebook Portal logo

    Facebook Is Launching a Portal TV Device: Here’s What We Know

    Facebook is getting ready to launch a TV streaming device in time for the holiday season, Variety has been able to confirm with multiple sources familiar with the company’s plans. The new streaming hardware will be part of the company’s Portal family of devices, featuring a camera, and combining video chatting with TV viewing and [...]

More From Our Brands

Access exclusive content