With Internet valuations surging and bankers circling Silicon Valley, online-games maker Zynga Inc. is preparing to test investors' appetite for an initial public offering that values the young company as high as $20 billion.
That would be double the price tag the San Francisco start-up, which makes "FarmVille" and other simple games played on Facebook's website, fetched just a few months ago when it sold shares to venture capitalists.
But since then, several Web companies have raised money at eye-popping valuations. Others have filed for multi-billion dollar IPOs. Shares of LinkedIn Corp. gained 80% its first day of trading last month, and the professional social network now sports a market value of $8 billion. Groupon Inc., which has racked up losses, has filed for an initial public offering that could value the online coupon site at more than $20 billion.
Zynga expects to raise as much as $2 billion in its IPO and it could file its paperwork as early as Wednesday, said people familiar with the matter. It will seek a valuation between $15 billion and $20 billion, these people said.
That could value the game publisher, which had about $850 million in revenue last year, at roughly the same as the two biggest videogame publishers—Electronic Arts Inc. and Activision Blizzard Inc.—combined.
Zynga has selected Morgan Stanley to lead the offering, the people familiar said. Goldman Sachs Group Inc. is also a lead underwriter, and J.P. Morgan Chase & Co., Barclays Capital and Bank of America Merrill Lynch will play a role in the IPO, these people said.
Zynga is also talking to banks about a credit facility of at least $1 billion, which can perhaps be used for acquisitions or other methods of expanding the company's services, one of the people familiar with the matter said.
A Zynga spokeswoman declined to comment.
The rush of Web IPOs, coupled with a frothy start-up investment environment in Silicon Valley, has fomented fears that the Internet sector is reaching a frenzied level not seen since the late 1990s dot-com bubble.
Unlike LinkedIn and Groupon, however, Zynga is expected to generate a profit this year. Nitsan Hargil, an analyst at GreenCrest Capital Management LLC, a research firm that analyzes private companies, estimates Zynga will have revenue of nearly $1.5 billion this year and be profitable. Mr. Hargil, whose firm isn't involved in Zynga's fundraising efforts, said he is more intrigued by Zynga's potential for profits than other Web companies.
Founded four years ago by Internet entrepreneur Mark Pincus, Zynga offers its games free and generates revenue mostly through the sale of virtual goods—for example, a tractor that helps FarmVille players harvest crops. While the vast majority of players never spend a cent in its games, some players pay up so they can accelerate their progress in the game and enhance their status in the eyes of other players.
Still, Mr. Hargil says there are concerns about Zynga's dependence on Facebook. While the company has sought to diversify its business through mobile games, its greatest successes have been on the 600 million-member strong social network.
Zynga's games collectively have about 271 million active monthly players on Facebook, an audience nearly eight times the size that of the next biggest Facebook app developer, according to AppData.com, a firm that tracks activity on Facebook.
The relationship between Zynga and Facebook has been tense at times. Over a year ago, the two companies butted heads after Facebook pressured Zynga to adopt a payment system called Facebook Credits inside Zynga games. They finally reached an accord in May 2010, when Zynga agreed to a five-year deal to use Facebook Credits in its games.
So far, Zynga has turned its early success on Facebook into a formidable barrier to competition from other game developers. The company heavily promotes new games, like its recently released strategy game "Empires & Allies," to its huge audience of existing players, giving the company a marketing advantage its rivals lack.
"Empires & Allies" is now the second most popular app on Facebook, with about 42 million average monthly players. Zynga's "CityVille," with 88 million monthly players, is the first.
It's unclear how long Zynga can keep its edge as more established games companies become more serious about Facebook games. Electronic Arts, for one, recently announced plans to bring "The Sims," one of the most popular PC games of all time, to Facebook.
An IPO would likely lead to huge paydays for many Silicon Valley elite, most notably founder and CEO Mr. Pincus, who stands to become a billionaire, at least on paper. Other Zynga investors include Digital Sky Technologies, Kleiner Perkins Caufield & Byers, Union Square Ventures and other venture-capital firms, along with individuals like LinkedIn founder Reid Hoffman and Peter Thiel, an early investor in Facebook and other companies.
CNBC earlier reported about Zynga's possible IPO and its launch as early as this week.
COMMENTARY: Since it was founded in 2007, Zynga has grown to become the undisputed leader in online social game apps with roughly 265 million monthly active users on Facebook alone. According to AppData (see below), Zynga has four games in the Top 10 and eight games in the Top 25:
Revenues
According neXtup Research Zynga is estimated to grow at a CAGR of 20% from 2011 to 2014. Future growth is likely to be at a slower pace, primarily because the company is already one of the largest in the app space.
The app segment, mostly aided by new entrants, should grow at 18%. Zynga is privately-owned and does not publish actual financial data, but revenue estimates according to neXtup Research are as follows:
Business Model
According neXtup Research, Zynga’s games are free to play and Zynga derives its revenue through virtual goods, in-game advertising, lead generation and application installs.
Virtual Goods
Although the company has roughly 265M users, only a tiny fraction, less than 5% in our estimate, consistently make purchases of virtual goods. We estimate Zynga derives approximately 75% of its revenue from the sale of virtual goods. These goods are accessories in games that can enhance a player’s capabilities. For instance, a tractor or high-yield seeds could be useful accessories for a farmer in FarmVille. In Mafia wars, the accessories could be higher performance guns. All these accessories can be purchased with Zynga’s virtual currency. Each game has its own virtual currency that can be used only for that game. For instance, Coaster Cash used in Roller Coaster cannot be used for purchasing a gun in Mafia Wars.
Users can acquire virtual currency by paying with real dollars, inviting their friends or by performing services in some games. For instance, a FishVille player can earn virtual currency by performing maintenance work on other users’ fish tanks. We expect virtual goods sales to dominate the company’s revenue mix for the foreseeable future.
Lead Generation (or Offers Marketing)
Players can also earn virtual currency by signing up for offers (that are made by lead generation firms). We estimate that Zynga derives less than 5% of its revenues through lead generation. We expect Zynga to benefit from business generated from more reputable businesses even as it grapples with keeping scams off.
In-Game Ads
Over 95% of Zynga’s users never make a purchase. The company monetizes them through in-game advertisements that appear during a game session. Such ad dollars contributed, in our estimate, to 15-20% of the company’s 2010 revenues. We estimate Zynga currently generates $0.15 - $0.20 CPMs and the company will derive approximately 15% of its revenues through In Game Ads in the future.
Venture Capital Investments
Zynga has had no problems raising venture capital either, raising a combined total of $636 million (or $841 million**) in six rounds since 2008, and increasing its valuation to $8 to $10 billion. Here is a list of Zynga's well publicized venture capital raises since 2008:
- $10 million - Union Square Ventures, Foundry Group, Avalon and individual investors - January 15, 2008 (A Round)
- $5 million - Foundry Group, Avalon, Clarium, Pilot Group, Union Square Ventures, Peter Thiel, Reid Hoffman, Brad Pittman, Andy Russell, Andy Field - April 2008 (A-1 Round)
- $29 million - Kleiner Perkins, Avalon Ventures, Foundry Group, Union Square Ventures and Institutional Venture Partners. - July 22, 2009 (B Round)
- $15.18 million - Various Investors - November 16, 2009 (B-1 Round)
- $180 million - Digital Sky Technologies - December 19, 2009 (C Round) - Valuation: $1.5-$3.0 billion
- $147 million - Softbank - June 14, 2010 (D Round) - Valuation: $6.0 billion
- $250 million - Fidelity Investments and T. Rowe Price Group - February 16, 2011 (E Round) - Valuation: $8 to $10 billion
**According to information compiled from secondary stock broker SharesPost, neXtup Research, reported that Zynga raised $490 million in a C round 2-for-1 stock split in May 2011, but the only C round I was able to confirm is the $180 million from Digital Sky Technologies in December 19, 2009. That $490 million was based on an article dated May 6, 2011 appearing in Inside Social Games. If the $490 million investment is correct, then neXtup Research's venture capital investments for Zynga now total $841 million. In any event, tracking Zynga's venture capital investments has been a mixture of confirmed and unconfirmed reports. There's nothing on Zynga's website that confirms neXtup Research's number, and I could not find a list on SharesPost, so I am as confused as you are.
Current Valuation
According to neXtup Research, after the $490 million raise, Zynga has 841.8 million fully diluted shares outstanding with an average share price of $11.73, giving Zynga a post-IPO valuation of $9.875 billion.
The Market For Social Games
According to eMarketer, the total number of US social gamers will increase to 68.7 million or 29% of internet users.
US social gaming revenues are still relatively small when compared to the overall online advertising market, but growing rapidly.
According to an eMarketer forecast in July 2010, worldwide social gaming revenues are projected to grow to $1.526 billion by 2014.
There is quite a difference between Zynga's estimated revenues and eMarketer's U.S. and worldwide social game revenue estimates which I cannot account for. I assume that they know what they are doing. Keep in mind that Zynga does not publish its real revenue numbers. Therefore, if you have access to more accurate numbers, please post them including your sources as a comment. I am very curious myself.
Courtesy of an article dated June 29, 2011 appearing in The Wall Street Journal's Technology
This is a fantastic blog! I really enjoyed reading it - it is very thorough! I would love to see you do this for the 2013 games. Would you consider that?
Posted by: Sara James | 03/10/2013 at 10:48 AM