Bloomberg this morning reports that Zynga, the biggest maker of games on Facebook, is seeking a valuation of as high as USD 10bn in an initial public offering, according to two people briefed on the matter.
Zynga plans to raise about USD 900m by selling shares at about USD 8 to USD 10 apiece, said one of the people, who asked not to be identified because the plans haven’t been made public. Zynga would sell 10 % or fewer of its outstanding shares, which are scheduled to be priced on Dec. 15, the person said.
At USD 10 bn, Zynga would be valued at below the USD14.05 bn that the company said in regulatory filings represents its fair value. Zynga would also be the second-largest U.S. game company after Activision Blizzard Inc. (ATVI), which has a capitalization of USD 14.2 bn. Electronic Arts Inc. (ERTS), which bought Zynga rival PopCap Games in August, has a market value of USD 7.69 bn based on yesterday’s close.
Zynga would be valued at as much as 9.8 times trailing 12- month sales, compared with about 3 times for Activision and 2 times for Electronic Arts, according to data compiled by Bloomberg. Glu Mobile is currently valued at some 2.5 times trailing 12-month sales, according to data compiled by Yahoo Finance. At current share price levels, our top-pick G5 Entertainment is valued at around 3.5 times 2011 revenues (below 2 times if we use the 2012 revenue target of the company). Note that G5 Entertainment’s EBIT margin is around 35%.
We believe the Zynga IPO will create an increased interest for gaming companies in general and mobile gaming companies in particular. Of all the listed mobile gaming companies, G5 Entertainment grows the fastest and has the highest profitability.
I am long G5 Entertainment and you should be too!
Background info on Zynga:
Under Chief Executive Officer Mark Pincus, Zynga aims to capitalize on the popularity of social networks and virtual goods. The company lets users play games for free and then makes money by selling items — say, a townhouse in “CityVille” or a shipyard in “Empires & Allies.” Zynga is pressing ahead with IPO plans even as other Internet companies that recently sold shares, including Groupon Inc. and Angie’s List Inc., get hammered. Both were trading yesterday below their offer prices.
Founded in 2007, Zynga has hired Morgan Stanley and Goldman Sachs Group Inc. (GS) to manage the IPO. Zynga’s shares will trade on the Nasdaq Stock Market under the symbol ZNGA. Zynga updated its filings on Nov. 4 to show that 6.7 million of its users were paying customers in the first nine months of the year, up from 5.1 million in the year-earlier period. Revenue more than doubled to $828.9 million. The worldwide virtual-goods market will more than double to $22.5 billion in 2015 from $9.27 billion last year, according to Lazard Capital Markets. To help it add more customers hungry for virtual goods, Zynga is stepping up spending on research and marketing — which in turn is crimping profit. The company posted $30.7 million in net income in the nine months that ended in September, down from $47.6 million a year earlier. In October, Zynga announced a new service, called Project Z, geared toward reducing its dependence on Facebook users. The company also introduced new games, including “Zynga Bingo,” “CastleVille” and “Hidden Chronicles.”