Zynga Valuation Rises to Over $7 Billion | Hacker News Reader

Zynga Valuation Rises to Over $7 Billion

online.wsj.com

27 pointsjamesjyu27 comments

What is the fair valuation of a company which produces smokeless cigarettes which don't cause cancer, are virtually immune to regulation, and don't even require tobacco farms? Pretty high. Distasteful, but high.

Why are you so angry at them?

If the cigarettes don't cause cancer and aren't dangerous, what reason is there to ban them?

I think you're reading something I didn't say -- I'm not sure I'm even on board with banning the actual deathsticks (I could probably persuaded to go either way).

I find Zynga distasteful -- and I say this as someone who has paid them money because they push my buttons very successfully -- for social justice reasons. Basically, I think their entire business model is targeting weak people and extracting large amounts of money out of them in return for very little value. It is no skin off my nose that I spent $150 -- I knew what I was doing and I can make that much in my sleep -- but it distresses me to think about who is actually paying $600 million a year. I rather suspect that comfortably well off software entrepreneurs make up no significant percentage, and that more vulnerable members of society are getting taken to the virtual cleaners.

There are quite a few businesses with similar models. I find them pretty much universally distasteful. That doesn't mean I'd necessarily illegalize them.

The question is, how does Zynga compare to Facebook? If they have huge growth and half as many users and revenue, why aren't they valued at $25B?

It seems that, even for bubble Web 2.0 startups, Facebook is overvalued.

The argument could be made the Facebook has potential for more and faster rising growth than Zynga, which would raise their valuation. *(I agree that Facebook is overvalued)

The quasi-fraudulent nature of their business may be depressing their valuation somewhat.

I think this is a biased reaction because of HN's nature.

While most visitors to HN aren't fans of Zynga's products, there are millions of people for whom FarmVille et al. are large and truly enjoyable parts of their lives.

Those people who like Zynga aren't the same people who are to invest in it.

Personally I would pass on Zynga because I know they're in a precarious position. They're purposely addictive, which means legislation against it is always a potential. They're hugely dependent on Facebook to supply its users and Facebook will want more of that cash flowing right past them to someone else, meaning FB could cut them off anywhere or at least take a chunk out of their profits by forcing them to accept giving out a cut - which again if it ever happened would set a dangerous precedent across the board for Zynga.

Then, I just flat-out dislike Zynga. They're a parasite, they steal other peoples ideas and simply dump more cash into a game than the original creator can and market massively within their own games to out compete the people they're ripping off. They're like the mother of all leeches, they only win because they can suck the cash out of everyone faster than anyone else and that lets them grow and suck even more cash out of the next target they get.

"they only win because they can suck the cash out of everyone faster than anyone else and that lets them grow and suck even more cash out of the next target they get."

So... Wal-Mart?

A more appropriate comparison would be McDonald's.

If there's a case study for how execution trumps ideas, it's Zynga.

"They only win because they can execute better than their competitors" is kind of a silly statement to make.

If you word it like that, yes it sounds silly. If you word it like the truth that a $7 billion company can execute an idea better than the $0 dollar startup in a teenagers bedroom they just ripped off, then Zynga looks like what it really is: an uncreative bootleg factory.

The funny thing is, Zynga can't execute better. Their knock off games usually have inferior graphics and worse gameplay mechanisms, but they can exclusively advertise to everyone on Farmville and make the original developers look like the knock off.

I'm pretty skeptical that the government would start regulating addictive video games. Even though they are regulating video games for content I don't really see the government regulating addiction.

> I don't really see the government regulating addiction.

So no lessons learnt from the taxes laid on alcohol, tobacco, gambling (and depending on where you're from pharmaceuticals and perhaps even narcotics).

The governments method of regulation for addiction is to tax it. I wouldn't be surprised if online games begin getting taxes above and beyond simply the companies revenue.

Does it seem like I'm hating on casual gaming? It seems pretty apparent that Zynga isn't in the business of making great casual games so much as rabidly pursuing the monetization of casual games.

I feel pretty okay treating that as a little skeezy.

Two words: longterm outlook.

I think people see Zynga as having already reached a lot of its potential while not so much for facebook.

they have more staff / their average revenue per employee is less - and junkies aside, lockin is less with farmville than with facebook

My gut feeling -- without delving into the numbers -- is that this is a sensible valuation based on future earnings. Zygna are in a similar financial position to a casino. They make money based on addiction and those sorts of money flows are relatively predictable into the future.

Their major problem is that Facebook is an uneasy partner. Zygna make far more per-user than Facebook do and if they could, FB would almost certainly cut them out tomorrow.

The numbers: WSJ reports $400 million in profits on $850 million in revenue. $7 billion puts them at a 17.5 p/e ratio, or about in line with 3M, Pepsi and McDonalds. Netflix and Amazon, by comparison, are trading at a p/e of over 70. Facebook is around 50. Activision Blizzard - 34. Electronic Arts has about $3.6 billion in revenue, is losing money, and is valued at about $6 billion.

I'd say it's fair compared to the rest of the market.

P/E is a good start and theirs looks good next to the others you listed. But I'd be more interested in profit-per-user and profit-per-employee.

I think they had 200 million unique players, that puts profit-per-player at around $2/year. With 1500 employees it's ~$266,000 profit per employee per year. Very respectable, given that Google gets around $120,000/emp/year.

I agree and I'm not entirely sure that the company can sustain the same level of profitability, given the fickleness of gamers.

My big worry is that their profit margins return to industry average levels. There's plenty of reason to believe that they would earn closer to 5 or 10 percent vs. the ~%45 they currently get as time goes on. In that case, the company needs to grow to several billion dollars in revenue and become one of the largest game publishing companies in the world to support this valuation. I'm not entirely sure I see that happening for Zynga.

I'm not so sure. Zygna's model is less like conventional computer games (once-off payment or lately recurring payment) and much more like slots machine gambling. People get a little rush from their pointless achievements and are prepared to pay for it. Given that the product has almost zero distribution costs, I expect profits to remain high.

Even competition is going to struggle to bring down those profits, because of the same network effects Facebook now enjoys over competitors.

Another way of looking at that p/e is that it is 17.5 years earnings just to pay back your investment. Let's just call it ten, allowing for growth but also considering some hefty risk discounting, and allowing for the reduction in margin due to competition (mentioned in another comment).

This is a market that is three years old, and massively susceptible to discontinuities - specifically newcomers and legal changes. I postulate that they will avoid paying dividends for at least a decade, perhaps throwing out a mangy 10% stock buyback (after issuing 11% in stock options to employees).

I am inclined to put on even more risk discount. Personally, I'd invest at a p/e of 4, maybe, but keep in mind that I don't really know what they do; so I suppose I will change that to a p/e of 3.2, and let's round it off to 3.

Fully agree with this valuation. They are similar to Groupon in that they actually have REVENUE! When you talk about the "bubble" it is really referring to the astronomical valuations of companies that have no current revenue and no long term model of making money other than "advertising."

Uh, Zynga has been mostly advertising for a long time. I don't know the ratio now but I would not be surprised if it's still the majority of their revenue. Advertising is also money you know.

This makes no sense @ all.

The entire virtual currency market worldwide is 5B.

So Zynga is valued at 1.4 times the global annual sale for virtual currency. One company! That's insane, and makes me question who's still pumping up Zynga on second market.

From what I've seen in company valuations is that they (very) generally hit 10x revenue, at least for well established companies.

Last I saw Zynga was posting $600 million revenue, which lands Zynga at around $6 billion from the last figures I saw.

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