Interesting article featured at Forbes.com citing video game analyst Michael Pachter saying that he sees no signs of a bubble bursting for Social Gaming in general and Zynga in particular. Analyst consensus estimates for Zynga 2012 EPS is USD 0.26 and the Zynga share closed at USD 12.93 yesterday. That implies a 12-months forward looking PE-ratio of 50x. Nordic Investor wonders: if US industry experts consider a PE-ratio of 50x for Zynga not to be a bubble valuation, what would they think about G5 Entertainment, which is currently trading at a 12-months forward PE-ratio of below 14x? If G5 Entertainment was listed in the US, people would be all over it.
Here is the Forbes.com article:
“At the fourth annual Ayzenberg A-List Summit 2012 in San Francisco, Wedbush Morgan Securities video game analyst Michael Pachter delivered an engaging keynote that focused on social gaming. Pachter was bullish on Zynga and believes the social games giant will continue to grow as Facebook broadens its reach to new consumers in the U.S. and around the globe. Pachter agreed with Zynga founder Mark Pincus’s statement that social games like FarmVille and Words with Friends bring people together. He talked about older relatives who never played a game before sending him invites through Zynga games.
“The game industry has never had as many people playing its products,” said Pachter. “And those people are playing more hours than ever before.”
With more parents playing games, there are fewer obstacles to kids growing up with gaming. The stigma of games being violent and dangerous is fading away because social games are being played by such a wide range of players, including many new to the hobby.
“Social games are getting better,” said Pachter. “The opportunity is so large for developers because people want to work on these games. Look at what Zynga has been doing with CastleVille and Hidden Chronicles and they’re executed better. I’m not sure Zynga is going to grow in lockstep with Facebook numbers, but I think we’ll see them grow in both the U.S. and Europe. I think we’ll see Zynga grow to 200 million users.”
Pachter that believes social games, which are actually casual games, won’t impact the console business when it comes to Sony and Microsoft. But they already have impacted Nintendo, in terms of that company’s mainstream audience. He said the Wii has last gamers to social games, and he doesn’t expect Wii U to draw them back. Social games are also impacting the portable gaming space.
“Handhelds are under assault from tablets and smartphones, which is one of the fastest-growing sectors of social games,” said Pachter. “People who have handhelds are either hardcore Mario nuts or kids under 12. But those kids are now moving to tablets and smartphones. As soon as my kids got an iPod touch, they put away their Nintendo DS. My two young daughters have spent $17 between them on games for the past two years and the $4.99 game they bought they thought it was a rip-off. Free games and smartphones and tablets destroyed the casual market for handhelds.”
While free-to-play games continue to gain momentum, Pachter believes this business model is a mistake for the Western culture. “We don’t get any entertainment for free, whether it’s movies, TV, music, Hulu or NBC.com” said Pachter. “Everything has ads. If you’ve played Words with Friends on Facebook, and 19 million people have, it’s ad-supported. I haven’t heard a single person complain about ads between rounds. I think ads are coming to Farmville. If publishers can figure out a way to monetize the 98% of people who don’t pay for free-to-play games, then this industry will be huge.”
Pachter was critical of Electronic Arts and its focus on branded entertainment in the social games space. He said the company has had only one hit that they created, and that is in dire trouble. “I think EA’s view of branded entertainment that gets in the way of actually making money in social games,” said Pachter. “Peter Moore recently announced they were delaying a new social game a few months to make sure they deliver a polished gaming experience. But not having a polished game hasn’t stopped Zynga. They sometimes launch crappy games, but then they get better with updates.” Pachter said that while the branded strategy is powerful to bring people in to a social games experience, the secret sauce is to exploit your installed base “EA had a massive installed base for The Sims Social and they’ve lost half of it,” said Pachter. “And they’re f**king around trying to make the next game better and that’s really dumb.””