Zynga Bets the Farm on $1 Billion IPO

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Internet gaming company Zynga (NYSE:ZNGA) made its Initial Public Offering on Thursday, selling 100 million shares at $10 each and valuing the company at $9 billion. Shares will be open for public trading at 9:30 am in New York (2:30 pm GMT) on Friday.

The $1 billion raised makes Zynga the biggest tech IPO since Google (NASDAQ:GOOG) raised $1.9 billion in 2004.

Zynga’s Outlook

Revenues

The San Francisco based gaming company is known for many games including Words With Friends, CityVille, FarmVille, Texas HoldEm Poker, and CastleVille, which were the top 5 games on Facebook by active user numbers this week.

Though Zynga has more than 200 million active monthly users on Facebook, it generates revenue from less than 3% of them through sales of premium in-game items such as poker chips. The company also gets revenue from advertisers like Starbucks, which pays for visibility in CityVille by allowing users to build coffee shops.

Facebook Dependency

Though Zynga is one of the few technology companies that was actually profitable heading into its IPO this year, the concern remains about its dependency on Facebook (NASDAQ:FB). Though the company has developed games that operate on mobile devices and other platforms, games offered through the social networking site represent 95% of their revenue, a figure that isn’t due to change any time soon. This leaves investors with a degree of volatility; if the relationship were to diminish, Zynga revenues would rapidly deplete.

The So-Called “Tech Bubble”

2011 has been a big year for technology IPOs with companies like Pandora, Groupon and LinkedIn making their stock market débuts. With all of these companies going public and receiving valuations that often reach several billion dollars, some have considered the market for tech companies to be a significant bubble.

This opinion has developed as some consider companies to be valued too high for the level of income that they actually achieve. Well established companies with solid profits are traded at a much lower Price Earnings Multiple than many of these new technology companies. For example, the largest US oil company, Exxon Mobil has a PE ratio of 9.6, while LinkedIn has a PE ratio of 390.5. LinkedIn had profits of $10.31 million and is currently valued by market capitalization at $648.6 million.

Struggling in the Market

Though many technology companies have gone public this year, few have had a high degree of success in the market. After opening at $28 per share in November, Groupon closed on Thursday at $23.80. Similarly, LinkedIn opened trading at $83 per share in May and closed on Thursday at $66.38.

Zynga’s recent valuation has indicated that the company is more valuable than EA Games, a company that has been in the gaming industry for 25 years. This valuation has been made despite the fact that EA Games has revenues of approximately $4 billion per year, while Zynga has made $1.5 billion in revenues since the company began.

Why are the Companies Valued so High?

According to University of Michigan professor, Peter Adriaens, companies involved in social networking are valued so highly because of their potential to grow virally. He claims that while companies in the dot-com boom had to compete for an on-line audience to grow their business, the social networking companies of today grow as their user base grows. This causes companies that have a large user base to be valued at astronomically high levels because, with hundreds of millions of users, the potential for profitably monetising the site grows.

If the companies can find ways to effectively monetise their user base, they have the opportunity to make unbelievable profits, putting them in the high growth quadrant for investors and resulting in such high valuations.

Zynga to Set the Tone for Tech?

Some investors think that Zynga may set the tone for the technology market in 2012. Though the tech IPO market in 2011 has died out, Zynga could provide the push forward that the industry needs. A strong start for the internet gaming company could help to fuel strong results for Facebook, which is looking to go public in the second quarter of 2012. With solid performance from Zynga, talks could be subdued about a possible second dot-com bubble.

The company dramatically scaled back their initial pricing by over 50% since July when it was valued at $20 billion. After talks of offering shares at $20, the company settled on $10 per share for their Thursday IPO. This is in sharp contrast to companies like Groupon and LinkedIn, which offered shares at a much higher price. Some investors say that offering shares at the lower $10 range could provide value to shareholders and yields of up to 50%.

For now, investors eagerly await the Friday trading session. The eyes of the tech world are fixed squarely on Zynga.

References
↑ Stock Listing Values FarmVille Maker At £5.9bn
 Approaching IPO Day, Zynga Now Has The Top Five Games On Facebook
↑ A Tech IPO Bellwether: What to Watch as Zynga Stock Starts Trading
↑ So, Is There Another Tech Bubble Or Not?
 $9bn Zynga IPO is go

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