Why Zynga Should Be Worth $30 Per Share/靠谱吗？# Stock
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http://seekingalpha.com/article/415291-why-zynga-should-be-wort
Zynga's (ZNGA) official announcement last week of the upcoming launch of
Project Z, its own independent gaming platform on Zynga.com, is a true game
changer that fundamentally transforms Zynga's business model into that of a
social network, similar to Facebook (FB) and LinkedIn (LNKD), and should
lead to substantial multiples re-rating and long-term share price
appreciation, far beyond the initial jump witnessed last week. JPMorgan's
downgrade of Zynga yesterday based on valuation concerns is premature, as
the current share price reflects only a fraction of the potential long-term
value of Zynga as the leading social networking platform for online gaming.
Project Z fundamentally transforms Zynga's business model from being product
-driven with low barriers to entry, to a community-based gaming platform
that is highly defensible. Rather than be just a leading social game
developer and publisher, Zynga is now well positioned to transform itself
into the world's leading social network for online gaming and game discovery
, with ownership of a massive and proprietary social graph of gamers and the
world's most powerful distribution channel and cloud-based infrastructure
for third-party game developers. This should lead to significantly higher
long-term revenue growth and profitability with superior earnings visibility
, and shareholders are likely to be rewarded with significant multiple
expansion from current levels as the business gets valued more on par with
social platform plays Facebook and LinkedIn.
The Old Zynga
Zynga's original business model was purely focused on game development and
publishing, similar to traditional game developers and publishers such as
Electronic Arts (EA) and Activision Blizzard (ATVI), as well as the Chinese
online gaming companies such as Shanda Games (GAME), Changyou (CYOU) and
Giant Interactive (GA). These companies have all been trading at low P/E
multiples, primarily due to the unattractive characteristics inherent in
their business model. Similar to movie studios, game developers are subject
to substantial "hit" product risks, with uncertain product lifecycles and
poor long-term earnings visibility. Even for blockbuster hit games, their
lifespan and revenue generation capability will inevitably fade over time as
players complete the game and migrate to newer games. Furthermore, barriers
to entry are low, as any start-up game developer has the opportunity to
create the next blockbuster hit, which can rapidly take away market share
from incumbent titles. In particular, entry barriers for the new generation
of browser-based and mobile-based games are even lower than traditional
desktop-based games, as they tend to have significantly lower development
budgets. Finally, brand loyalty is limited, as the attractiveness and
monetization capability of each game is based almost entirely on its own
merits, rather than on the brand recognition of its game developer or
publisher.
As the pioneer and leader in social gaming with multiple hit games and a
broad portfolio spanning diverse genres, Zynga enjoys strong first-mover
advantages and brand recognition, along with significant cross-selling
synergies across its games. However, due to the limited product lifecycle of
each game, the old Zynga has to incur significant and recurring R&D and
marketing expenses to constantly develop and market new games over time to
replenish its game portfolio and sustain user and revenue growth.
The New Zynga
With Project Z, Zynga completely transforms the very nature of its business
model. By becoming a social network for online gaming, Zynga no longer has
to depend entirely on organic game development to drive revenue growth.
Rather than relying on Facebook as a distribution channel for its self-
developed games, Zynga.com allows Zynga to become the distribution channel
and infrastructure provider of choice for third-party game developers, and
enables Zynga to realize significant revenue sharing opportunities without
incurring incremental content creation costs. Most importantly, Zynga will
be able to leverage its massive user base of 240 million monthly active
online gamers (as of 4Q 2011) to take advantage of two simple yet powerful
network effects and virtuous cycles inherent in online gaming:
Network effect 1: more gamers on the Zynga.com social network -> more third-
party game developers want to develop for Zynga.com -> more games available
on Zynga.com -> more new gamers joining the Zynga.com social network
Network effect 2 (only applies to certain games): more friends playing a
given game -> more appealing that game becomes -> more friends playing that
game
These two powerful network effects combined with Zynga's first-mover
advantages should allow Zynga.com to become the undisputed leading social
network for gaming (no existing or potential competitor has anywhere near
the scale of online gamers that Zynga has already accumulated). While Zynga.
com will initially still need to rely on Facebook log-in and Facebook
credits to drive traffic and monetization, it will be able to reduce that
reliance over time as it constructs and grows its own proprietary social
graph via zFriends. By cultivating and strengthening its own social graph
via Zynga.com, Zynga will be able to improve user stickiness and brand
loyalty, and significantly reduce its reliance on Facebook to acquire and
retain users. It's worth emphasizing here the proprietary nature of Zynga.
com's social graph of gamers, which will be owned entirely by Zynga, nearly
impossible for any competitor to replicate, and become the company's most
valuable asset in the long run. Each node in this social graph will
represent a gamer and his/her detailed game playing habits and other game-
related user data that will not be available on Facebook or anywhere else,
while the connections between nodes will represent relationships between
gamers that will be different from the social relationships that these users
have on Facebook. This is analogous to how LinkedIn owns its own
proprietary social graph of professionals and career-related data, along
with unique professional-based connections between its users. I envision a
future where there will be multiple dominant social graphs across different
verticals, rather than Facebook being the only dominant social graph on the
web. In the same way that LinkedIn has built the dominant social graph for
professionals, Zynga has a very real opportunity to build the dominant
social graph for online gamers.
Valuation
Two key factors in valuing a consumer Internet business are: 1) the
dominance of its market position, and 2) the degree of defensibility and
strength of entry barriers provided by network effects. The single most
important trait common to leading consumer Internet companies such as
Facebook, LinkedIn, Yelp (YELP), TripAdvisor (TRIP) and Zillow (Z) is that
they are each unique online assets with dominant market positions in their
respective verticals, protected by incredibly powerful network effects where
the user value proposition of each service grows exponentially as the
number of users increases. Zynga will also share this trait as it becomes
the dominant social network for online gaming, with a highly defensible
market position and economic moat protected by network effects arising from
its robust ecosystem of gamers and game developers. Zynga is currently being
valued at approx. 50% discount to social networking platform leaders
Facebook (assuming $100bn valuation) and LinkedIn:
Enterprise Value/Revenue
Enterprise
Value
(US$ bn)
2011
Revenue
(US$ bn)
Enterprise
Value/
Revenue
Facebook
100.0
3.71
26.9x
LinkedIn
8.1
0.44
18.7x
Zynga
9.1
1.14
8.0x
Enterprise Value/User
Enterprise
Value
(US$ bn)
Users (mm)
Enterprise
Value/
User
Facebook
100.0
8451
118.3x
LinkedIn
8.1
842
97.0x
Zynga
9.1
1533
59.4x
1 Number of monthly active users in Dec. 2011
2 Number of unique visitors in Dec. 2011
3 Average monthly unique users in 4Q 2011
Source: Company filings
The new Zynga under a platform-based business model will likely see
substantial share price appreciation driven by: 1) multiples expansion as
investors value Zynga as a social networking platform play with significant
operating leverage, rather than a product-cycle driven business, and 2)
higher-than-expected revenue and earnings growth. As the Zynga.com platform
grows over time, expect Zynga to demonstrate material improvements in its
margins and cost structure as it captures lucrative third-party developer
economics while gradually shifting its revenue mix away from Facebook
credits. This should lead to a significant multiples re-rating of its shares
to be on-par with leading social networking platforms such as Facebook and
LinkedIn. In addition, as Zynga.com increases the number of third-party
games on its platform, expect growth in its key operating metrics, including
MAUs (Monthly Active Users) and MUPs (Monthly Unique Payers), to rapidly re
-accelerate, leading to a long-term revenue growth trajectory that is far
above current street estimates.
Using back-of-the-envelop calculations, And all this if we conservatively
estimate Zynga's 2013 revenues to be $2bn (15% above current analyst
estimates) and enterprise value/revenue multiple to expand modestly to 10x,
we would get an enterprise value of $20bn and a share price of approximately
$29.70 is before we have even factored in the huge and untapped
monetization opportunity from legalized online gambling.
Disclosure: I am long ZNGA.
Zynga's (ZNGA) official announcement last week of the upcoming launch of
Project Z, its own independent gaming platform on Zynga.com, is a true game
changer that fundamentally transforms Zynga's business model into that of a
social network, similar to Facebook (FB) and LinkedIn (LNKD), and should
lead to substantial multiples re-rating and long-term share price
appreciation, far beyond the initial jump witnessed last week. JPMorgan's
downgrade of Zynga yesterday based on valuation concerns is premature, as
the current share price reflects only a fraction of the potential long-term
value of Zynga as the leading social networking platform for online gaming.
Project Z fundamentally transforms Zynga's business model from being product
-driven with low barriers to entry, to a community-based gaming platform
that is highly defensible. Rather than be just a leading social game
developer and publisher, Zynga is now well positioned to transform itself
into the world's leading social network for online gaming and game discovery
, with ownership of a massive and proprietary social graph of gamers and the
world's most powerful distribution channel and cloud-based infrastructure
for third-party game developers. This should lead to significantly higher
long-term revenue growth and profitability with superior earnings visibility
, and shareholders are likely to be rewarded with significant multiple
expansion from current levels as the business gets valued more on par with
social platform plays Facebook and LinkedIn.
The Old Zynga
Zynga's original business model was purely focused on game development and
publishing, similar to traditional game developers and publishers such as
Electronic Arts (EA) and Activision Blizzard (ATVI), as well as the Chinese
online gaming companies such as Shanda Games (GAME), Changyou (CYOU) and
Giant Interactive (GA). These companies have all been trading at low P/E
multiples, primarily due to the unattractive characteristics inherent in
their business model. Similar to movie studios, game developers are subject
to substantial "hit" product risks, with uncertain product lifecycles and
poor long-term earnings visibility. Even for blockbuster hit games, their
lifespan and revenue generation capability will inevitably fade over time as
players complete the game and migrate to newer games. Furthermore, barriers
to entry are low, as any start-up game developer has the opportunity to
create the next blockbuster hit, which can rapidly take away market share
from incumbent titles. In particular, entry barriers for the new generation
of browser-based and mobile-based games are even lower than traditional
desktop-based games, as they tend to have significantly lower development
budgets. Finally, brand loyalty is limited, as the attractiveness and
monetization capability of each game is based almost entirely on its own
merits, rather than on the brand recognition of its game developer or
publisher.
As the pioneer and leader in social gaming with multiple hit games and a
broad portfolio spanning diverse genres, Zynga enjoys strong first-mover
advantages and brand recognition, along with significant cross-selling
synergies across its games. However, due to the limited product lifecycle of
each game, the old Zynga has to incur significant and recurring R&D and
marketing expenses to constantly develop and market new games over time to
replenish its game portfolio and sustain user and revenue growth.
The New Zynga
With Project Z, Zynga completely transforms the very nature of its business
model. By becoming a social network for online gaming, Zynga no longer has
to depend entirely on organic game development to drive revenue growth.
Rather than relying on Facebook as a distribution channel for its self-
developed games, Zynga.com allows Zynga to become the distribution channel
and infrastructure provider of choice for third-party game developers, and
enables Zynga to realize significant revenue sharing opportunities without
incurring incremental content creation costs. Most importantly, Zynga will
be able to leverage its massive user base of 240 million monthly active
online gamers (as of 4Q 2011) to take advantage of two simple yet powerful
network effects and virtuous cycles inherent in online gaming:
Network effect 1: more gamers on the Zynga.com social network -> more third-
party game developers want to develop for Zynga.com -> more games available
on Zynga.com -> more new gamers joining the Zynga.com social network
Network effect 2 (only applies to certain games): more friends playing a
given game -> more appealing that game becomes -> more friends playing that
game
These two powerful network effects combined with Zynga's first-mover
advantages should allow Zynga.com to become the undisputed leading social
network for gaming (no existing or potential competitor has anywhere near
the scale of online gamers that Zynga has already accumulated). While Zynga.
com will initially still need to rely on Facebook log-in and Facebook
credits to drive traffic and monetization, it will be able to reduce that
reliance over time as it constructs and grows its own proprietary social
graph via zFriends. By cultivating and strengthening its own social graph
via Zynga.com, Zynga will be able to improve user stickiness and brand
loyalty, and significantly reduce its reliance on Facebook to acquire and
retain users. It's worth emphasizing here the proprietary nature of Zynga.
com's social graph of gamers, which will be owned entirely by Zynga, nearly
impossible for any competitor to replicate, and become the company's most
valuable asset in the long run. Each node in this social graph will
represent a gamer and his/her detailed game playing habits and other game-
related user data that will not be available on Facebook or anywhere else,
while the connections between nodes will represent relationships between
gamers that will be different from the social relationships that these users
have on Facebook. This is analogous to how LinkedIn owns its own
proprietary social graph of professionals and career-related data, along
with unique professional-based connections between its users. I envision a
future where there will be multiple dominant social graphs across different
verticals, rather than Facebook being the only dominant social graph on the
web. In the same way that LinkedIn has built the dominant social graph for
professionals, Zynga has a very real opportunity to build the dominant
social graph for online gamers.
Valuation
Two key factors in valuing a consumer Internet business are: 1) the
dominance of its market position, and 2) the degree of defensibility and
strength of entry barriers provided by network effects. The single most
important trait common to leading consumer Internet companies such as
Facebook, LinkedIn, Yelp (YELP), TripAdvisor (TRIP) and Zillow (Z) is that
they are each unique online assets with dominant market positions in their
respective verticals, protected by incredibly powerful network effects where
the user value proposition of each service grows exponentially as the
number of users increases. Zynga will also share this trait as it becomes
the dominant social network for online gaming, with a highly defensible
market position and economic moat protected by network effects arising from
its robust ecosystem of gamers and game developers. Zynga is currently being
valued at approx. 50% discount to social networking platform leaders
Facebook (assuming $100bn valuation) and LinkedIn:
Enterprise Value/Revenue
Enterprise
Value
(US$ bn)
2011
Revenue
(US$ bn)
Enterprise
Value/
Revenue
100.0
3.71
26.9x
8.1
0.44
18.7x
Zynga
9.1
1.14
8.0x
Enterprise Value/User
Enterprise
Value
(US$ bn)
Users (mm)
Enterprise
Value/
User
100.0
8451
118.3x
8.1
842
97.0x
Zynga
9.1
1533
59.4x
1 Number of monthly active users in Dec. 2011
2 Number of unique visitors in Dec. 2011
3 Average monthly unique users in 4Q 2011
Source: Company filings
The new Zynga under a platform-based business model will likely see
substantial share price appreciation driven by: 1) multiples expansion as
investors value Zynga as a social networking platform play with significant
operating leverage, rather than a product-cycle driven business, and 2)
higher-than-expected revenue and earnings growth. As the Zynga.com platform
grows over time, expect Zynga to demonstrate material improvements in its
margins and cost structure as it captures lucrative third-party developer
economics while gradually shifting its revenue mix away from Facebook
credits. This should lead to a significant multiples re-rating of its shares
to be on-par with leading social networking platforms such as Facebook and
LinkedIn. In addition, as Zynga.com increases the number of third-party
games on its platform, expect growth in its key operating metrics, including
MAUs (Monthly Active Users) and MUPs (Monthly Unique Payers), to rapidly re
-accelerate, leading to a long-term revenue growth trajectory that is far
above current street estimates.
Using back-of-the-envelop calculations, And all this if we conservatively
estimate Zynga's 2013 revenues to be $2bn (15% above current analyst
estimates) and enterprise value/revenue multiple to expand modestly to 10x,
we would get an enterprise value of $20bn and a share price of approximately
$29.70 is before we have even factored in the huge and untapped
monetization opportunity from legalized online gambling.
Disclosure: I am long ZNGA.