The Banking and Strategy Initiative

Chillin' out till it needs to be funded

Zynga debuts this week as $ZNGA (Tomorrow)

Updated Wednesday (Pricing today/tomorrow) , trading: Thursday

The current revenues for the period till September for Zynga are a high $828 mln even as more than half of it is from the cash of 2009 and 2010 realised in virtual goods with accounting life of upto an average of  18 months – 3 years in its Farmville, Cityville and Empires and Allies franchises. The company has more than 234 million monthly active users and at least three games with nearly 1 million daily active users.

Last years revenue recognised was close to $350 mln. Promoter Marc Pincus has issued himself a special class of share to maintain voting control and Pincus and investor PE Kleiner Perkins ar enot selling a single share of their holding tomorrow. Marc Pincus gets 37% voting share from his 12% stake this week on.(Google has a 10-1 voting ratio on its promoters’ holdings, Zynga 70-1)

Only 3% of its active 7.7 mln users are paying users on the network but that is not such a bad thing as each game has its own healthy ecosystem that thrives in increasing the number of active users you know. however detractors aver that it could have plateaued real cash in this year and after revenue recognition fails to add a blip like on iPhone(where the change in accounting actually depressed revenues for a particular period), it could not be the golden goose it is likely to be on open tomorrow

Pincus has been around on the social media innovation circuit having invested in Facebook, Twitter, Friendster and Napster having also worked in a Venture Capital firm after starting at Bain

The latest bear analyses’ of Zynga counting lower subscribers for their newer games probably do not realise the number of paying customers is still the same and their dependence on Facebook is more also Facebook’s dependence on them as Zynga plans to step out n an independent platform

Our verdict: There is no golden goose and that premium will not last but the stock is undervalued by a factor of 2 to say the least. Also its innovation quotient would last it a virtual life of at least 5 years when you step in to buy it tomorrow before it is checked on whether it can deliver more


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