Zynga: Now With More Zing!

Zynga, the company behind Facebook's most popular games, is seeking a round of funding close to $500 million that implies a valuation nearing the whopping $10 billion mark.

According to the New York Time's Deal Book, the company is at an advanced level of talks with several mutual fund biggies, including T. Rowe Price (Nasdaq: TROW  ) and Fidelity Investments, to pursue new financing.

For names like T. Rowe and others offering up precious liquidity to big-time digital properties like Zynga, it seems like everyone's jumping on board to buy into these hot new Internet properties. Is a second bubble inflating, or is there real value to Zynga's gaming franchises?

Why the hype?
Founded in 2007 by Mark Pincus, Zynga's massive success is attributable to the exposure provided by the social networking giant Facebook. Want to know why Zynga is such a hot name despite its role as a piggy-back player?

Out of the top ten Facebook applications, five are from Zynga's stable including its top two apps, Cityville and Farmville. According to AppData, Zynga boasts a whopping total 275 million active monthly users. Its most popular game, CityVille, which allows users to create and manage virtual cities, has 95 million active monthly users, while its first big hit, FarmVille, continues to engage 51 million active monthly users.

Compare the above numbers to the 12 million-odd World of Warcraft players subscribed to the latest version of the game from Activision Blizzard (Nasdaq: ATVI  ) (a multi-billion property, by the way), and you can see why investors are so excited.

It's not just a two-trick pony at Zynga, either. The company maintains a few other popular titles, including Texas Hold'em Poker, Mafia Wars, and FrontierVille -- all intended for the social networking space.

The Zynga model is an interesting one in the gaming world. The company allows users to access its games for free, but it charges real money for the purchase of virtual goods like seeds in FarmVille or poker chips in Texas Hold'em Poker. The model is relatively new, but the concept is the same as just about every other gaming company out there: Get 'em hooked quickly, and keep 'em reaching for their wallets. And in fact, the numbers are beginning to look mighty impressive.

On trend
As recently as last April, the San Francisco-based company filed for papers authorizing the issuance of fresh stock valuing the company at around $4 billion. But obviously, things have changed quickly for the company.

As a matter of fact, we all know that there is a lot of buzz surrounding fast-growing private web companies focused on large-scale consumer markets that are expected to go public in a couple of years. Last week, I wrote about why I think the looming LinkedIn IPO matters. Investors are also eyeing plenty of other lucrative web start-ups with a lot of interest.

Goldman Sachs (NYSE: GS  ) recently invested $450 million in Facebook, valuing it at an astounding $50 billion. Micro-blogging site Twitter has recently raised a significant amount of funding and is reportedly valued at an eye-popping $10 billion. Group buying service Groupon raised $950 million in a recent round of funding, valuing it around $5 billion -- more recent reports show the company believes it could be worth $15 billion in an IPO.

Speaking of IPOs, professional networking site LinkedIn and online radio service Pandora Media have both recently filed for IPOs. Acting right on trend is venture capital firm, Kleiner Perkins Caufield & Byers, which has investments in four of the most hyped social media start-ups like Facebook, Twitter, Groupon, and Zynga.

In fact, Zynga has already raised a hefty amount from a couple of venture capital firms, but Google (Nasdaq: GOOG  ) has also invested an undisclosed amount in the gaming company, too. Considering Zynga's proximity to Facebook, some even believe the move to be a highly strategic play against Facebook's fast growth.

The general point here is that these companies are hot, and Zynga is no exception. The company is sitting in precisely the right place at precisely the right time.

Broadening horizons
From a numbers standpoint, Zynga's last annual revenue was estimated to be around $850 million, the bulk of which came from the sale of virtual goods. Although its profitability is generated from its association with Facebook, recently the company has begun to diversify itself away from the juggernaut. It has tied up with Yahoo! (Nasdaq: YHOO  ) so that it can be accessed from their website as well, and expanded its reach to mobile devices, with its popular applications on Apple's (Nasdaq: AAPL  ) iPhone and iPad; Zynga's apps are reportedly doing very well.

In a bolder move, Zynga is endeavoring to start a separate gaming destination where users can access its games without Facebook or Yahoo! The company is also working on a project called Zynga Live, which would serve as its own independent social gaming forum.

The irony here is that in terms of market value, Zynga has left behind traditional gaming giants like Electronic Arts (Nasdaq: ERTS  ) , a company which had once considered acquiring it. I believe this is a true testament to the value of this newly significant company. Clearly, the company is doing something right, and it is doing that something at precisely the right time.

The Foolish bottom line
For its part, Zynga's hiring of investment banker Dave Wehner from Allen & Co. as its CFO may just be a clear signal of an impending IPO. According to The New York Times' Dealbook, the IPO may happen as early as the first quarter of 2012. However, as a clear word of caution, the market might be getting a little overheated with valuations of such start-ups. After all, we've seen excitement turn into panic in the digital space many times before.  

Aditi Baid does not own shares of any of the companies mentioned in the article. Google is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers recommendation. Apple and Activision Blizzard are Motley Fool Stock Advisor picks. Yahoo! is a Motley Fool Global Gains choice. The Fool has written puts on Apple. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard, Apple, Google, and T. Rowe Price Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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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 February 25, 2011, at 4:38 PM, bottomfisherman wrote:

    Great article and the reason I am thumbs down on ATVI competition is heating up, other players coming into the market like Zynga, DC Comics, and TTWO now seems to have their act together and all seem to have a stragetic direction that is lacking at ATVI.

  • Report this Comment On May 26, 2011, at 11:59 AM, garrettandy wrote:

    so guys, invest in zynga or not?

  • Report this Comment On July 05, 2011, at 1:39 PM, Onigato wrote:

    Garrettandy,

    Wait a few weeks after the IPO, unless you can get in BEFORE the IPO. Zynga will explode, and it seems that they are actually profitable, so they may stay up for a week or two, but when the insiders decide to cash out, its going to drop again. THAT'S when you buy.

    Me personally, I'm avoiding it like a radioactive potato. I don't like their products, I don't like their "micro-transaction" business model, and I don't like them. But they will make money, at least for a while.

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