Valuation of Zynga

TL;DR

This paper evaluates Zynga's IPO valuation by developing a model of its user base and revenue growth, concluding that the company's valuation was likely inflated and only justifiable under highly optimistic growth scenarios.

Contribution

It introduces a new modeling approach combining user base forecasting and revenue growth to assess social gaming company valuations.

Findings

Zynga's valuation is only justified under extreme growth scenarios.

The proposed model estimates a valuation range of 4.17 to 7.02 billion USD.

The actual IPO valuation of 6.6 billion USD appears overestimated.

Abstract

On December 16, Zynga, the well-known social game developing company went public. This event is following other recent IPOs in the world of social networking companies, such as Groupon, Linkedin or Pandora to cite a few. With a valuation close to 7 billion USD at the time when it went public, Zynga has become the biggest web IPO since Google. This recent enthusiasm for social networking companies, and in particular Zynga, brings up the question whether or not they are overvalued. The common denominator of all these IPOs is that a lot of estimates about their valuation have been circulating, without any specifics given about the methodology or assumptions used to obtain those numbers. To bring more substance to the debate, we propose a two-tiered approach. First, we introduce a new model to forecast the global user base of Zynga, based on the analysis of the individual dynamics of its major games. Next, we model the revenues per user using a logistic growth function, a standard model for growth in competition. This leads to bracket the valuation of Zynga using three different scenarios (base one, optimistic and very optimistic): 4.17 billion USD in the base case, 5.16 billion in the high growth and 7.02 billion in the extreme growth scenario respectively. Thus, only the unlikely extreme growth scenario could potentially justify today's 6.6 billion USD valuation of Zynga. This suggests that Zynga at its IPO has been overpriced.