Zynga Valuation Range Mid-Point of $5.5 Billion, Zynga IPO Price Likely to Be Cut Materially
Zynga New 3-Class Voting Stock Structure Confirmed, Zynga's "Project Z" Attempt to Diversify Away From Facebook, Where the Company is For First Time Facing Meaningful New Competition

1.)  ZYNGA 3-CLASS VOTING STOCK STRUCTURE NOW OFFICIAL:

The previously rumored three class voting stock structure proposed by Founder Marc Pincus is now official:

The change was confirmed on page 134 of Zynga's latest IPO (S-1) Amendment dated Sep. 21st:

"Class A Common Stock, Class B Common Stock and Class C Common Stock

Voting Rights

Holders of our Class A common stock, Class B common stock and Class C
common stock have identical voting rights, provided that, except as
otherwise expressly provided in our amended and restated certificate
of incorporation or required by applicable law, on any matter that is
submitted to a vote of our stockholders, holders of Class A common
stock are entitled to one vote per share, holders of Class B common
stock are entitled to seven votes per share and holders of Class C
common stock are entitled to 70 votes per share."

(In addition, the new stock structure is referred to in 2 sentences on revised Voting Rights of Zynga's Amended Articles of Incorporation confirmed filed with the Delaware Secretary of State two days earlier on Sep. 19th.)  

Such an inequitable voting power structure will likely continue to produce stiff investor resistance. 

2.)  Zynga Valuation: $5.5 Billion at Mid-Point of PrivCo.com's Valuation Range, Far From $20 Billion Hoped For

PrivCo.com's financial research team has estimated a fair valuation range for Zynga to see if the original IPO valuation of $20 billion could hold up to scrutiny.

Comparable gaming companies to Zynga include Electronic Arts (market cap of $7.58 billion, or about 2.2x its revenue) and Activision Blizzard (the largest, with a market cap of $14.5 billion, or about 3.1x its revenue). If we apply a 3x revenue multiple to PrivCo's estimate of Zynga's revenues this year of $1.2 billion, that gets us to about $3.6 billion. However, Zynga is growing faster than traditional game companies (so far) so an aggressive valuation might be justified of as high as 7x revenues, which would bring its valuation to $8.4 billion on the high end. Either way, we don't see how it can reasonably get to $20 billion as in IPO valuation even with an aggressive valuation multiple.

New Competitive Threats Require Valuation Discount Despite Zynga's October "Project Z" New Platform Initiatives:  

PrivCo also must discount for the risk that Electronic Arts, Activision and others are now attacking Zynga's core market of the Facebook
platform. In less than 2 months EA's Sim Social now has 66 million users, higher than Zynga's 59 million users, and Sim Social's user
number on Facebook is growing while Zynga's user numers are falling. (Zynga itself has seen that its core market is now under attack by developers of far more sophisticated games, thus yesterday's "Project Z" event to attempt to diversify away from Facebook and try to regain lost momentum for its IPO with by dangling the hope of new markets. Unfortunately, Zynga largely has tied itself to Facebook contractually for 5 years, limited its ability to substantially diversify away from Facebook in the near future.)

Sim Social also has proven that Zynga remains in a hit-driven business; although some investors see investing in Zynga as a proxy for an investment in Facebook, this isn't true; the reality is that EA's Sim Social has shown that Facebook can continue to do well even if Zynga does or not, so an IPO investment in Zynga is not in fact an accurate proxy for investing in Facebook.

Factoring in these risks, that brings us to a fair risk-adjusted valuation of Zynga between $5 billion to $6 billion is what we would conclude.

To sum up, the valuation range PrivCo.com calculates for Zynga Inc. is:

Low-End: $3.6 billion
Mid-Point: $5.5 billion
High-End: $8.4 billion

This still provides Zynga with a multi-billion valuation and remains impressive given the company is barely 3 years old. But it's a far cry from $20 billion, and Zynga's insistence on that high a valuation (and its inequitable 3-class stock voting structure) may further stall Zynga's IPO and giving the appearance of a company that has lost its momentum.

September 2011 Update: Zynga's IPO Filing Amendment Shows User Growth Stalls; Facebook's Usage Stall Harms Zynga User Growth; Zynga Accounting Change added one-time $27 million revenue benefit to first half 2011 Revenues; Still Zynga has a Strong Cash Positioning Making an IPO Non-Imperative

In new S.E.C. flings made on September 19, 2011, Zynga shows that its growth actually already had slipped by other measures, but now for the first time it recently slipped according to self-proclaimed Zynga's "preferred measure" of DAUs, from 62 million to 59 million). 

Source: www.privco.com/private-company/zynga-inc

Note that this figure was actually as high as 67 million in the second quarter of 2010, something WSJ overlooks, so the drop is actually worse, from 67 million DAUs for 1st quarter 2010 to just 59 in the most recent quarter. (Note that MAUs are also below where they were in the first quarter of 2010, from 236 then to 228 now).

These trends are worrisome. 

The suggestion that Zynga's slipped mostly on its own (that is, unrelated to Facebook's growth) is only partly correct. If you read closely in the S1 amendment it states that Zynga depends on Facebook for "virtually all" of its revenues. (Indeed in late 2010 Zynga agreed to an amended contract with Facebook that ensures this remains the case for at least the next 5 years.) The part of "slipping on its own" if you will is the fact that there are new entrants (like Rovio and even traditional games maker electronic arts) agressively peeling social games audience away from Zynga, which used to have the playground all to itself and now must share. So its part right that Facebook could grow even while Zynga shrinks. However, the fact that Zynga still represents the majority of the social games market means that if Facebook usage were growing quickly the rising tide would also lift Zynga's boat. That isn't happening.

Another interesting factoid is that Zynga quietly revised downward its estimate of how long a user plays its games for the first time to just 11 months from 14 months. This little accounting trick added $27.3 million in revenue so far this year (about $55 million for the year) and added about $20 million to net income for the 1st half of 2011. Sneaky! So the revenue growth is actually slower than shown by $27.3 million. Quoting the filing's fine print:

"The estimated weighted-average life of durable and consumable virtual goods included in bookings during the six months ended June 30, 2010 was 14 months compared to 11 months for the six months ended June 30, 2011. In the six months ended June 30, 2011, online game revenue increased $27.3 million related to changes in our estimated average life of durable virtual goods."

(Without this change in accounting judgement call, Zynga's revenues would have been just $494.7 million and its profit would have turned into a loss!)

All in all based on our analysis so far http://www.privco.com/private-company/zynga-inc, we see:

* Zynga is a hit-driven business, with no recent hits (no major new game releases in the first half of 2011) and aging titles; games historically have a gradual decline after initial enthusiasm. 
* Zynga's brief period of benefiting from a first mover status on Facebook is gradually fading; Zynga no longer has nor will ever again have a nearly exclusive presence for social games, and will have to compete with other game developers for the next hit quarter after quarter and year after year
* Zynga's metrics confirm the decline
* If Facebook's usage were growing dramatically, Zynga could still show rapid growth temporarily despite declining market share based on a smaller share of dramatically growing audience; however dramatic Facebook usage growth is no longer happening
* However, Zynga continues to have a strong cash position and does not need to go public or raise capital at this time, unlike many other private companies with IPOs pending or delayed. (Needing to go public and having investors/founders wanting to go public and get liquidity asap are of course two different matters.)

For PrivCo's full Private Company Financial Report on Zynga, Inc., please see: http://www.privco.com/private-company/zynga-inc

About PrivCo

PrivCo Media, LLC (www.privco.com) is the premier source for business and financial data on major privately held companies. PrivCo publishes exclusive financial data on over 209,150 private companies, as well as details on over 79,243 private company deals, including private company M&A deals and multiples, venture capital investments, private equity buyouts, pre-IPO activity, restructuring, and more.