Social gaming company Zynga has filed their widely anticipated initial public offering (IPO) with the Securities and Exchange Commission.
In the filing, CEO Mark Pincus pointed out his company’s stated goals, which include that games should be free, accessible to anyone at any time, and that they should do good, an area where Mr. Pincus points out that the company raised over $10m for disaster recovery charities relating to the Alabama tornadoes and Haiti earthquake. They also pointed out their high player count, which includes about 60m active daily users and 232m active monthly users. They also let it be known that they have $1.12bn in total assets available, and are looking to raise another $1bn with their IPO. The company’s profits and revenue have taken a sharp upturn in the past three years, going from a loss of $22m on income of $19m in 2008 to a $90.6m profit on revenues of $597.5m in 2010. In the first three months of 2011, the company profited $11.9m on revenues of $235.4m, contrasting with last year for the same quarter, where they made $6.4m on $101m.
Despite the company’s financial health and strong revenues, they fired off some warning shots about the risks in their sector. They dedicated an entire area of their filing to the risks associated with Facebook.
Facebook is the primary distribution, marketing, promotion and payment platform for our games. We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future. Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock.
They went onto state that they would be harmed if Facebook either found another favourable company, started developing their own games, or if their position as the number one social network suffered. They also noted that they are in a rapidly changing medium and have only been involved in said medium for a few years, which makes predicting the market highly volatile. Another issue brought up was the fact that a large portion of the company’s revenue is by virtual goods sales to a small percentage of players and that turnover was high; a key to their business was the necessity to keep these players paying. Finally, they noted that a small number of games were responsible for all of their revenue, and that they would suffer if these franchises lost popularity.
The company admitted that despite their experience in developing for Facebook, they would have to increase their mobile development in order to ensure success. They stated that they have limited experience developing for mobile, and that they needed to evolve beyond payment methods provided by social networks (such as Facebook Credits, which are mandatory for use on Facebook and give Facebook 30% of all sales).
Zynga’s valuation is estimated to be anywhere from $15m to $20m. The price range of the IPO itself has not been determined.
Analysis: I’m going to do my best to put aside my personal feelings about Zynga, which basically sum up to “they stole all of their games from other companies, and Mark Pincus makes Robert Kotick look like Fluttershy“, and look at this from a purely financial standpoint. In other words, I’m going to put on my Michael Pachter Hat™ and look at this from the viewpoint of a financial analyst.
There is entirely too much risk involved in this property for me to recommend the stock to anyone who is looking to get a solid return on their investment. This is an amazing, five bedroom house built on a very narrow foundation of Facebook and little else. Facebook is a very fickle market, because they change their rules and regulations at the drop of a hat, and don’t particularly care if anyone approves of them or not, as their more privacy-focused customers are keenly aware. This is a volatile business to base your entire source of revenue around. They’re looking to develop into mobile, and so far, they’ve done that fairly well with Words With Friends, but that just proves another problem the company has: they have not developed one original game yet. Words With Friends is just Scrabble without the expensive license, and I’ve talked about their other games at length.
Excepting that, Zynga is banking on a brand new business model that has not had time to sufficiently “breathe”, if that makes any sense. Right now, we don’t know if the “freemium” model that Zynga uses – where you can play for free, but good luck actually getting anything done – is a fad of a legitimate business model. It’s entirely possible that the casual gamers who keep this system afloat with microtransactions move on to either something that doesn’t exploit them as hard, or even the next shiny object. We don’t know what the next proverbial shiny object will be, and from the sounds of it, neither does Zynga.
If you buy this stock when it comes out, you are banking on the assumption that Zynga will be able to develop for mobile devices, keep their virtual goods-centric business model across any platform they choose to develop for, and that the freemium games market will expand into the next five years. Whether that kind of risk if your forte is up to you. Personally, I see a lot of strikes, and not enough positives to justify the investment.