Did You Buy Zynga Today?

Zynga's (Nasdaq: ZNGA  ) path to the public wasn't nearly as hectic of Groupon's debut last month, but they both share fame as being among the most anticipated IPOs this year.

Founded in 2007, Zynga saw its shares changing hands for the first time this morning. The offering price came in at $10, at the top of the expected range of $8.50 to $10, which values the company at $8.9 billion. The offering includes 100 million shares, raising about $1 billion for the social-game maker.

No cover charge
Reaching a nearly $9 billion valuation in less than five years is quite a feat, but that figure is lower than some of the initial estimates as high as $20 billion, which were rather dubious. With the figures Zynga is putting up, its hefty valuation is hardly a shocker. In the nine months ended Sept. 30, the company grew revenue by 106% compared with the same period last year.

We're not talking about growth off a small base; we're talking about going from $401.7 million in sales to $828.9 million. The company is already profitable, although its bottom line contracted because of heavy R&D and marketing spending.

Zynga has piggybacked on Facebook's steady rise to the top of social networking and was one of the pioneers of the freemium gaming model, where games are offered for free up front and in-game purchases for virtual goods bring in all the dough. Advertising pitches in a fraction toward revenue -- less than 6% -- while it's mostly the Zynga Poker chips and FarmVille Farm Cash that pays the bills.

The model is so popular that it's now frequently used throughout mobile gaming by companies such as Glu Mobile (Nasdaq: GLUU  ) as well.

Zynga with friends
The company has smartly been weaning its reliance on Facebook's platform and ventured into the platforms of Apple (Nasdaq: AAPL  ) iOS and Google Android. Looking on my iPhone App Store right now, I see that Zynga occupies three out of the top 10 spots under "Top Grossing," including two "free" games, Dream Zoo and Poker by Zynga. The third is the popular Words With Friends that Zynga picked up when acquiring developer Newtoy last year.

CEO Mark Pincus has built a young company that already goes head-to-head with gaming stalwarts such as Electronic Arts (Nasdaq: ERTS  ) and Activision Blizzard (Nasdaq: ATVI  ) , which have been increasingly emphasizing on mobile. Even giants such as Disney (NYSE: DIS  ) and Microsoft (Nasdaq: MSFT  ) are getting in on the mobile action. Microsoft just this week released its first-ever iOS game Kinectimals.

Zynga's initial valuation already tops that of EA, whose market cap now stands near $6.9 billion, and it's been around for nearly three decades.

Who's the boss?
If you do decide to buy Zynga shares today, don't even think about having a say in anything, since the Class A shares being offered have significantly fewer voting rights than the other classes, which are held by insiders. Class A shares get one vote, Class B shares get seven votes, and Class C shares get 70 votes.

B and C shares are all held by Pincus and other execs and directors and together represent 98.2% of the voting power among all shares. Pincus alone beneficially owns 38.5% of the voting power. Holders of B or C shares can transfer or sell them, but then they immediately convert to the one-vote A shares, which proportionally increases the voting power of those still holding B and C shares.

Will you buy Zynga today?
Zynga has some promising signs, but at the same time I have reservations over its lofty valuation and the sustainability of the freemium model, not to mention the corporate-governance risks. I've never been a fan of games that try to coax you in for free and upcharge you for virtual merchandise, but I also can't argue with the growth the company is putting up.

What do you think? Did you pick up some shares today? Share your thoughts in the comments box below.

Apple iOS and Google Android have started a revolution, and they have both inadvertently become powerful gaming platforms that have disrupted dedicated portable-gaming devices. Zynga is leveraging the promising potential of the platforms, but its future is far from certain as app development is a new gold rush. Competitors come from all angles, from long-standing incumbents to small independent developers. There's a better way to play the explosive growth brought on by the mobile revolution: hardware components. Check out this 100% free report on 3 Hidden Winners of the iPhone, iPad, and Android Revolution.

Fool contributor Evan Niu owns shares of Apple and Walt Disney, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Activision Blizzard, Microsoft, Apple, and Google and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Walt Disney, Microsoft, Apple, Google, and Activision Blizzard, creating bull call spread positions in Microsoft and Apple, and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2011, at 5:23 PM, ohuongfool wrote:

    Placed an buy order lower than the closing price. Expired.

    I played Zynga poker and usually was asked to buy chips. Few are willing to buy unless the chips can be sold back or to other players.

  • Report this Comment On December 16, 2011, at 7:09 PM, glowe920 wrote:

    I play Farmville, Cityville and Castleville and have never, and will never pay anything for any of the merchandise. If I can't play the game with what is earned by playing the game then I'll stop playing. There are so many games online for free that I can't see any value in paying Zynga/Facebook to play.

  • Report this Comment On December 16, 2011, at 7:30 PM, goalie37 wrote:

    I was going to buy, but my limit order withered. I'm hoping a neighbor stops by and buys them for me.

  • Report this Comment On December 16, 2011, at 7:40 PM, HarryCarysGhost wrote:

    Ummm.....no!

  • Report this Comment On December 17, 2011, at 11:32 AM, FutureMonkey wrote:

    Good one goalie37

    Market cap is roughly 10x sales and 80x profit. Not unheard of valuation for a rapidly growing company and profitable company with a platform for global penetration, but certainly not for a "fat-pitch."

    Clearly people do pay the in game purchases or they wouldn't represent 94% of $800M in revenue.

    The challenge for Zynga is continuing to perform at these incredible levels in a heavily competitive environment. R&D investment bodes well to maintain their product on the front page of every AppStore visit. Expectations are very very high, so stumbles could frighten investors.

    I'm not buying shares, but I'd be hesitant to gamble on them failing either.

    FM

  • Report this Comment On December 17, 2011, at 2:38 PM, moble81 wrote:

    I bought 100 shares at 10.00 I look for the stock to double with-in a year

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