Zynga, the social gaming giant, which created games like Farmville, Cityville, Frontierville and Zynga Poker has finally filed its S-1 with the SEC. According to its S-1 filing, Zynga aims to raise about $1 billion in the offering, implying a valuation of close to $20 billion. The IPO will be underwritten by Morgan Stanley, BofA Merrill Lynch, Barclays Capital, Allen & Company, Goldman Sachs and J. P. Morgan.
Zynga was founded in 2007 by Mark Pincus, and has been the creator of some of the most popular games on Facebook. It has grown extremely fast, either organically or through acquisitions. It makes most of its revenues by selling virtual goods to Facebook users who play its games. While it does have millions of users, whether or not it will be able to monetize them well and generate enough revenues to justify the $20 billion valuation is what many are worried about. It places Zynga at a valuation which is roughly the same as EA and Activision Blizzard combined.
It had revenues of $597.46 million in 2010, and made close to $235 million in revenues in the first quarter of 2011. While it has good revenue figures, its net income and profit margin isn’t all that impressive considering that its primary product is virtual goods. It had a net income of just $90.56 million in 2010, implying a P/E of 222. It has had tremendous growth in the past 2-3 years, but it seems to have plateaued in the last couple of months.
Besides, the very first risk factor that they state in their S-1 says it all: “if we are unable to maintain a good relationship with Facebook, our business will suffer”. Zynga’s entire business depends on its relationship with Facebook. It has been trying to expand its offerings to other platforms, but without much success.
News of the Zynga IPO will undoubtedly trigger discussions of whether we are in a tech bubble, which even I’m starting to believe now. Zynga may turn out to be the Pets.com of 2011.
Check out the complete Zynga S-1 filing at the SEC.