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Report: Zynga's $5.51B Valuation Higher Than Retail-Centric EA
by Kris Graft [PC, Console/PC]
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October 26, 2010
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The private market value for venture-backed Farmville and Mafia Wars developer Zynga has surpassed the public market value of Electronic Arts, signifying a continuing consumer shift from packaged video games to online social games, a new report said Tuesday.
Bloomberg BusinessWeek cited SharesPost, an exchange for shares of privately-held companies like Zynga, which states that the San Francisco-headquartered company has an estimated value of $5.51 billion, greater than Nasdaq-traded EA's $5.16 billion value.
This valuation is based on the SharesPost's indications on the price of shares in Zynga trading on the closed, private market, largely from Zynga employees, since the company is not yet public.
Zynga generates the majority of its revenue from the sale of virtual items in games like Farmville, Mafia Wars and FrontierVille, which players access through social networks like Facebook. An analysis at Business Insider in April this year estimated that Zynga's revenues would jump 70 percent year-on-year to $525 million in 2010.
There has been continuing speculation this year that Zynga is positioning itself for a public IPO. This latest value estimate at the company's private market cap is higher than other estimates that placed the company's value anywhere from between $1 billion and $5 billion.
While some may be skeptical of the supposed value of Zynga, ThinkEquity analyst Atul Bagga told BusinessWeek, "The valuation is not that crazy, given what’s going on in the market. ... It’s not that terribly expensive seeing the growth prospects." He projects that the virtual goods market will reach $3.6 billion in three years.
EA has realized the potential of the social game market, however, with the 2009 acquisition of social game maker Playfish for up to $400 million, including $100 million in performance-based earnouts.
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Is there any physical value in Modern Warfare 2? In Avatar? In Bad Romance?
I don't think so.
The entire media industry is predicated on buying stuff that is virtual, isn't it?
All media is virtual, isn't it?
Obviously, when I say "virtual goods", I am referring to the latter, and not the former. Generally the term "media" is used for games, movies, books, music, etc. and the distinction is a sound one.
Its amazing seeing those numbers.
If you think this is the future you are naive......
If they turn those huge ip's into other non facebook properties..ala the transmedia conversation they might do alright but they do not have the experience to do that.
Good luck with sustaining that valuation with ripped ip's, a market that no longer has constant profile spam, and a company culture that disdains creativity.
And as far as the "Zynga steals IP" argument, I would say that anyone who wrote a MUD variant right through to WoW without paying the authors of MUD 1 or D&D are probably guilty of the same thing. What we see with the social games iterating on existing IP isn't new, it just happens so much more quickly, which makes it so much more obvious.
Still going strong from what I understand...
The report is heavily based on the size of Zynga's user base. What is their retention rate? The report doesnt mention.
Sometimes I think analyst reports should be peer-reviewed...
This valuation is based on little more than estimates. To my knowledge, not a single shred of solid financial data has ever been released by Zynga, so quite how this evaluation has any weight whatsoever is beyond me.
I think the only solid financial fact Zynga's ever released is how much it donated to the Haiti fund.
Please note:
"So where does the $5 billion valuation come from?
The valuation is based on a 15.3X multiple on our projection of Zynga’s 2015 EBITDA of $659 million. I’m the first to admit valuation is part art and part science."
So it's wild speculation about what Zynga *might* be worth in 2015.
This is all about that rumoured angling for IPO. No surprises, mind. If Zynga's managed to pull the wool over the eyes of its MAU base, it's only fitting it should do the same for its potential investors.
"This valuation is based on the SharesPost's indications on the price of shares in Zynga trading on the closed, private market, largely from Zynga employees, since the company is not yet public."
Of course, you can argue that people are privately trading at levels that might not be sustained when Zynga goes public, but SharesPost are claiming that people are trading shares at that valuation - ie, somebody would be buying 1% of the company for $50 million.
That's not wild speculation about what Zynga might be worth in 2015; its what Zynga might be worth today based on wild speculation about its EBITDA in 2015.
The financial community doesn't really care about historic numbers: it cares about the future. It is pretty unusual to base a valuation on an EBITDA forecat that is five years away (both the time-value of money and the difficulties of estimating EBITDA so far away militate against that). But primary valuation techniques focus on EBITDA in 2010 and 2011, not on 2009.
So the technique is a little weird (2015 versus 2010), but it is not speculating about future value, only speculating about future earnings.
More importantly, Simon is right; it's based on grey-market trading of small minority stakes.
As Nicolas says below, that can drive the price up (because a small trade can imply a large valuation), but it can also drive the price down (because it is riskier to trade in illiquid stocks with no market).
This is no different to the suggestion that Facebook was worth $15 billion when Microsoft bought a very small stake.
There is a dozen ways to evaluate Zynga's value. It's notorious that when only a few shares of a non public, hyped up company are traded, their value will spike up dramatically.
The smaller the group of people trading something the more individuals get to dictate what it's worth. And if there are payoffs to increasing that worth, then why not?
Someone please correct me on why they can't just choose their value if it's privately set.
Food for thought.
The responsibility of a game designer has always been placing logical value on virtualized entities: God says Earth is home, Man turned checker board into a battle-field, and companies like Zynga and other Digital Content Creators tell consumers that their RGB pixels are relevant.
As a game designer, isn't our job about crafting the consumer's experience of logical relationships between virtual entities? Apparently, the masses are defined by casual gamers, and apparently casual gamers like to purchase things like "Cute Brown Sheep". I know I didn't begin my journey as a game designer to create games with this model, frankly, social gaming isn't what I had in mind at all.
I guess if you're in it for the cash, the social gaming way seems good. State Farm Insurance thinks it's a good way to go, they offered to keep my crops safe until the 27th.
At the same time, the social gaming framework may be the start of some really cool means of gaming that have yet to be considered.
I don't play Zynga social games, but I don't hate them either. Last time I heard, gaming companies selling physical software are now saying that the best solution to making a profit is to sell games that are half done are have less content at 60.00 usd and then later charge that consumer upwards of 14.99 usd to purchase add-ons. Where is the call for that being a silly idea? Activision, EA, and others do it all the time on the consoles and computers gaming front, but its OK because they make games we like to play...