Zynga Stock Analysis
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Zynga Stock Analysis

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Detailed report on Zynga.

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    Zynga Stock Analysis Zynga Stock Analysis Presentation Transcript

    • The IPO Analysis December 2011 © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Table of Content1) The Thesis2) Risks That Need to Be Monitored3) Should You Participate in the IPO?4) The Business Model: Unique and Potentially Very Powerful i. How Zynga Makes Money ii. Zynga-at-a-Glance iii. Overview of Key Metrics5) Analysis of Key Metrics and Financials6) Financials i. Income statement, balance sheet, cash flow7) Valuation 1) Base case, Bull case, and Bear Case 2) Comparable Valuations8) Questions We Would Be Asking Management9) Conclusion10) Appendices © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Summary ThesisFactor Impact DetailsPowerful Business Model Favorable Rapid innovation, low-cost deployment, and strong cash flow at maturityMarket Leader in Paradigm Favorable Focused on statistical analysis to improveShift of Social Gaming player engagement and monetizationStrong Industry Growth Favorable Social gaming market is large ($7BN) and rapidly growing ($14Bn in 2015)Dependent on Facebook Negative Zynga relies on FB’s social platform to achieve virility and keep customer acquisition costs lowValuation Neutral $9.25 is a fair valuation, wait for a better entry point as a few meaningful unknowns exist © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Zynga Represents a New Paradigm in Gaming, but Valuation Seems Fair• Zynga is an online gaming and analytics company, utilizing social interactions and data analysis to make games entertaining & engaging.• It’s a new business model in gaming, enabling rapid product releases, viral adoption, and low-risk failures; equates to a competitive advantage.• Social games are for the mass market, focusing on simplicity and ease- of-use to offer a relatively mindless form of entertainment.• Zynga is obsessed with building repeatable and scalable processes. They have built their own statistical analysis system, which is enables them to make data-driven decisions to improve user monetization.• They are very dependent on a healthy relationship with Facebook. 93% of revenue came through FB platform, and FB takes a 30% cut of all virtual goods revenue. Also keeps customer acquisition costs low.• In order to reduce their dependence on Facebook, Zynga is expanding internationally and onto additional platforms (Google + and Mobile). © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Zynga Represents a New Paradigm in Gaming, but Valuation Seems Fair• Zynga also diversifying from FB by building Platform Z. This will be a proprietary platform that utilizes FB’s technology to access friends. Zynga will be able to keeps more $$ from virtual goods.• The upcoming shift to Platform Z has the potential to be disruptive, especially if it ruffles Facebooks feathers due to lost revenue.• Huge market opportunity in social gaming: – Video software game market is $49.0BN; social game market is $7.3BN, expected to grow to $14BN by 2014• Zynga has learned the secret sauce of a success game: – Has the top selling social game on Facebook every month since 2009 – Has 4 / 5 of the top selling games on Facebook based on DAU• Likely to be very aggressive with acquisitions after failed attempts to purchase PopCap (reportedly $950M) and Rovio (reportedly $2.2BN).• Founder & CEO, Mark Pincus, will have 36% of the voting power, so shareholders won’t really have a say in corporate matters. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Risks That Must Be Monitored: Part 1• Zynga needs to be successful on mobile platforms to maintain growth trajectory. Mobile has different gaming mechanics, payment tendencies, payment systems, and channel partners.• International expansion is also key to growth, but is uncertain due to the need for localized content.• Increased regulations regarding user data may limit game adoption or targeted advertising.• The average life for recognizing a durable virtual good is declining. – Declined from 18 months to 15 months in the 9 months ending Sep. 2011 vs. the same period last year. This is either an indication that games are declining in player engagement or an accounting maneuver to generate revenue in the short-term.• The nature of social gaming creates user attrition, requiring Zynga to rapidly release updates and new games to maintain growth.• Zynga has hit upon a winning formula, but that also means that it’s game mechanics are virtually identical across games, which risks user burn-out as they become bored of the “same old stuff”. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Risks That Must Be Monitored: Part 2• Zynga’s Platform “Z”, which will reduce their reliance on Facebook, may be a good long-term endeavor, but may cause pain during the transition. Facebook will not want to see Zynga take all the traffic off away, so expect a fight.• There is a massive pile of shares outstanding, 717 million after the IPO, with another 200 million of dilutive options and restricted stock that will impact the share count over time. Therefore, financial leverage may be less than the market understands.• Founder and CEO Mark Pincus has cashed out $109M, so he may act overly-aggressive to hit a “homerun”.• New games may not be not driving meaningful new user growth, potentially indicating stronger than expected cannibalization.• International users don’t monetize as well; mobile users monetize better-than-average. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • The Offering: Should You Participate? © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Proposed IPO Valuation Seems Fair, but is a Massive Haircut From the Last Round• We think the stock is fairly valued at $9.25, or a market cap of $6.6 billion.• We used an average of Price / Sales and EV / EBITDA to generate our price targets.• If you are bullish on where the market will price the company, then there may be upside to $11.33, or $8.1 billion.• Conversely, if you are bearish on how the market will value the company, there is downside to $7.27, or $5.2 billion. • The valuation “bubble” was confirmed in Q2 and Q3 when traditional mutual funds pretended to play Venture Capitalist and valued Zynga at $14 billion. • FYI, this also occurred with Groupon. • Also, private markets like Second Market are creating silly valuation from investors with little financial information. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Zynga Has a Good “Story to Tell”, Which Investors Will LoveSource: Zynga Road Show Presentation • Aggressive new game launch should bolster user growth, while a growing base of existing games will support bookings growth. This combination should enable decent bookings, revenue, and income growth over the next few quarters. • Investors will love the right-hand slide that lays out multiple growth avenues. However, the addition of new platforms such as Google will have limited impact since FB is the most broad platform you could ask for. The other columns are legitimate growth opportunities. • International growth will be the lynchpin for valuation, in our opinion. Without it, Zynga will have a hard time growing into the market’s – and our– expectations.Source: www.retailroadshow.com © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • The Business Model: Unique & Potentially Very Powerful © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • The Business Model Cash paid by users and advertisers in the period BOOKINGS Virtual Goods REVENUE AdvertisingCOST OF GOODS Web hosting and data center costs; payment processing fees SOLD Salaries and benefits for customer support & infrastructure teams RESEARCH & Salaries and benefits for software engineers and developersDEVELOPMENT Outside services and consulting; allocated facilities and overhead SALES & Player acquisition costs; general branding and marketing costs MARKETING Salaries and benefits for sales and marketing team GENERAL & Salaries and benefits for executive, finance, legal, & HR teamsADMINISTRATIVE Outside legal and consulting services; charitable donations © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • How Zynga Makes Money NEW GAMES EXISITING GAMES MONTHLY UNIQUE USERS DAILY ACTIVE USERS UNIQUE PAYERS BOOKINGS PER UNIQUE PAYER BOOKINGS © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Zynga-at-a-Glance © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • KEY METRICS1) Monthly Unique Users: How many unique players per month2) Monthly Average Users: How many games played per month3) Daily Average Users: How many games played per day4) Unique Payers: How many unique individuals paid for items5) Bookings: Cash collected from virtual goods and advertising6) Unique Bookings per Unique Payers: Bookings per unique payer7) DAU as % of MAU: Indicates user engagement © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Total Bookings Have Stalled, but SteadyImprovement in Underlying Trends © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Zynga is Becoming Increasingly Effective atMonetizing its User Base • Zynga’s obsession with A/B testing and data analysis, allows the company to take a scientific process to making decisions geared towards making more money. • Continuous product updates allows Zynga to add components to the game that drive additional revenue opportunity. • As Zynga adds new game genres, they should be able to capture a more diverse set of paying customers. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • User Base Has Stagnated as Game ReleasesSlowed in 1H 2011, but Monetization Up • Notice the decline in MAU and DAU throughout 2010. This was due to Facebook limiting Zynga games from posting game updates on Friend’s walls. • MAU and DAU have been in decline in 2011 due to a limited slate of new games. But MUU has held steady. • Despite the stagnate user growth, Zynga is more effectively getting active users to buy virtual goods. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • User Engagement (While High) is Trending Lower • With approximately 25% of monthly users playing a game on a daily basis, this is a high degree of engagement. However, the level is flat to declining. This calls into question the longevity of Zynga games due to their formulaic nature. • Same trend with DAU as % of MUU. • The number of games users play per day is also declining. Does this mean saturation? © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Zynga Games Have Some Longevity, and the Company is Diversifying it’s Revenue Base 2008 2009 2010 9M 2010 9M 2011 % ChangeZynga Poker 14 39 120 80 124 55%Mafia Wars 4 47 167 129 116 -10%FarmVille - - 179 116 224 93%FrontierVille - - - - 133 nmCityVille - - - - 91 nmTotal for Top Games 18 86 466 325 688Total Revenue 19 121 597 402 829% of Total 93% 71% 78% 81% 83% Revenues: 9M 2011 © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Zynga Needs to Innovate Rapidly to Offset User Attrition and Maintain Growth • This chart says it all. It shows how quickly users disengage with new games. • This means that Zynga needs to bring new games to market quickly to offset user defection • Also, without huge “hits”, Zynga will have a hard time growing. • However, evenSource: VentureBeat. Zynga: Behind the IPO. http://bit.ly/ryiKbW though users decline, bookings per game climb for several quarters. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Based on FarmVille, Games Monetize Over 2+ YearsSource: Zynga’s Retail Road Show Presentation • These charts imply that previous page’s graph does not accurately reflect how Zynga monetizes games. • This information implies that the initial spike in users is a function of Zynga amazing distribution and cross-marketing platform, while the monetization scheme develops over time as the “power users” continue playing and Zynga iterates the game based upon users interactions and decisions. • While FarmVille is one of Zynga’s biggest hits, management indicated that this trend is representative of other games. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Financials* See our website to download the full Excel file atwww.investorsmosaic.com (but be forewarned, this is premium content) © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Summary Income Statement ESTIMATES 2008 2009 2010 2011E 2012E 2013E 2014ERevenue 19.4 121.5 597.5 1,167.6 1,603.0 2,027.1 2,277.7Cost of Revenue 10.0 56.7 176.1 308.4 392.6 455.9 489.5Gross profit 9.4 64.8 421.4 859.2 1,210.4 1,571.2 1,788.2Research & Development 12.2 51.0 149.5 414.3 726.0 938.8 1,042.0Sales & Marketing 11.0 42.3 114.2 170.1 223.8 265.5 286.8General & Administrative 8.8 24.2 32.3 155.9 164.7 185.3 198.3Total Operating Expenses 32.0 117.5 295.9 740.3 1,114.5 1,389.6 1,527.1Operating Income (22.6) (52.8) 125.5 118.8 95.9 181.6 261.1Interest Income (Expense) 0.3 0.2 1.2 1.6 1.5 1.5 2.5Other Income (Expense) 0.2 (0.2) 0.4 (0.4) 0.4 0.3 0.5Pre-tax Income (22.1) (52.8) 127.1 120.1 97.7 183.3 264.0Taxes 0.0 0.0 36.5 74.1 38.8 64.2 92.4 Tax rate 0.0% 0.0% 28.7% 61.7% 39.8% 35.0% 35.0%Net Income (Loss) (22.1) (52.8) 90.6 46.0 58.9 119.2 171.6Deemed Dividend to Series B-2 - - 4.6 - - - -Attrituable to Participating Securities - - 58.1 30.7 - - -Net Income (Loss) B & C Shares (22.1) (52.8) 27.9 15.3 58.9 119.2 171.6EPS $ (0.18) $ (0.31) $ 0.08 $ 0.02 $ 0.08 $ 0.15 $ 0.21Adjusted EBITDA 4.5 168.2 392.7 322.9 334.1 483.8 600.3Shares Outstanding 120.0 171.8 329.3 714.0 741.2 786.7 810.3 © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Margins Summary Income Statement 2008 2009 2010 2011E 2012E 2013E 2014EMarginsGross Margin 2008 48.4% 2009 53.3% 2010 70.5% 2011E 73.6% 2012E 75.5% 2013E 77.5% 2014E 78.5%Gross Margin bps change 48.4% 53.3% 49 70.5% 172 73.6% 31 75.5% 19 77.5% 20 78.5% 10 bps change 49 172 31 19 20 10EBITDA Margin 23.4% 138.5% 65.7% 27.7% 20.8% 23.9% 26.4%EBITDA Margin bps change 23.4% 138.5% 1,150 65.7% (727) 27.7% (381) 20.8% (68) 23.9% 30 26.4% 25 bps change 1,150 (727) (381) (68) 30 25Operating Margin -116.3% -43.5% 21.0% 10.2% 6.0% 9.0% 11.5%Operating Margin bps change -116.3% -43.5% 729 21.0% 645 10.2% (108) 6.0% (42) 9.0% 30 11.5% 25Netbps change Margin -113.8% 729 -43.5% 645 4.7% (108) 1.3% (42) 3.7% 30 5.9% 25 7.5%Netbps change Margin -113.8% -43.5% 703 4.7% 482 1.3% (34) 3.7% 24 5.9% 22 7.5% 17 bps change 703 482 (34) 24 22 17Incremental Gross Profit Margin 54.3% 74.9% 76.8% 80.7% 85.1% 86.6%Incremental Gross Profit MarginIncremental EBITDA Margin 54.3% 160.3% 74.9% 47.2% 76.8% -12.2% 80.7% 2.6% 85.1% 35.3% 86.6% 46.5%Incremental EBITDA MarginIncremental Operating Margin 160.3% -29.6% 47.2% 37.4% -12.2% -1.2% 2.6% -5.3% 35.3% 20.2% 46.5% 31.7%Incremental Operating Margin -29.6% 37.4% -1.2% -5.3% 20.2% 31.7%As % of RevenueAs % of RevenueResearch & Development 62.6% 42.0% 25.0% 35.5% 45.3% 46.3% 45.8%Research & DevelopmentSales & Marketing 62.6% 56.6% 42.0% 34.8% 25.0% 19.1% 35.5% 14.6% 45.3% 14.0% 46.3% 13.1% 45.8% 12.6%Sales & MarketingGeneral & Administrative 56.6% 45.5% 34.8% 20.0% 19.1% 5.4% 14.6% 13.4% 14.0% 10.3% 13.1% 9.1% 12.6% 8.7%General & AdministrativeTotal Operating Expenses 45.5% 164.7% 20.0% 96.8% 5.4% 49.5% 13.4% 63.4% 10.3% 69.5% 9.1% 68.6% 8.7% 67.0%Total Operating Expenses 164.7% 96.8% 49.5% 63.4% 69.5% 68.6% 67.0%YOY % ChangeYOY % ChangeBookings 562% 110% 39% 35% 26% 12%BookingsRevenue 562% 526% 110% 392% 39% 95% 35% 37% 26% 26% 12% 12%RevenueGross profit 526% 589% 392% 551% 95% 104% 37% 41% 26% 30% 12% 14%Gross profit DevelopmentResearch & 589% 320% 551% 193% 104% 177% 41% 75% 30% 29% 14% 11%Research & DevelopmentSales & Marketing 320% 285% 193% 170% 177% 49% 75% 32% 29% 19% 11% 8%Sales & MarketingGeneral & Administrative 285% 174% 170% 33% 49% 384% 32% 6% 19% 13% 8% 7%General & AdministrativeTotal Operating Expenses 174% 268% 33% 152% 384% 150% 6% 51% 13% 25% 7% 10%Total Operating Expenses 268% 152% 150% 51% 25% 10%Adjusted EBITDA 3597% 134% -18% 3% 45% 24%Adjusted EBITDAOperating Income 3597% 134% 134% -338% -18% -5% 3% -19% 45% 89% 24% 44%Operating IncomeNet Income (Loss) 134% 139% -338% -272% -5% -49% -19% 28% 89% 102% 44% 44%Net Income (Loss)EPS 139% 67% -272% -128% -49% -75% 28% 271% 102% 91% 44% 40%EPS CountShare 67% 43% -128% 92% -75% 117% 271% 4% 91% 6% 40% 3%Share Count 43% 92% 117% 4% 6% Inc. www.investorsmosaic.com © Investors’ Mosaic, 3%
    • Balance SheetBALANCE SHEET 2008 2009 2010 2011E 2012E 2013E 2014ECash & Equivalents 127 188 1,440 1,633 1,969 2,290Marketable Securities 73 550 321 321 321 321Accounts Receivable 7 80 136 187 236 266Income Tax Receivable 11 37 4 6 7 8Deferred Tax Assets - 24 28 36 46 51Restricted Cash 1 3 4 4 4 4Other Current Assets 3 24 40 52 66 74Total Current Assets 222 906 1,974 2,239 2,649 3,014L-T Marketable Securities - - 1 1 1 1Goodwill - 60 95 95 95 95Other Intangible Assets 1 44 44 56 70 79PP&E 35 75 256 376 485 621Restricted Cash - 14 21 21 21 21Other L-T Assets 1 13 34 41 51 58Total Assets 259 1,113 2,425 2,828 3,372 3,888Accounts Payable 22 33 58 74 86 93Other Current Liabilities 35 79 115 147 186 209Deferred Revenue 178 408 496 640 809 909Total Current Liabilities 235 521 670 862 1,082 1,211L-T Deferred Revenue 46 57 26 34 42 48L-T Deferred Taxes - 14 15 15 15 15Other Non-Current Liabilities - 39 72 95 121 136Total Liabilities 280 630 783 1,005 1,260 1,409Shareholders Equity (21) 482 1,642 1,823 2,112 2,479Total Liabilities & Equity 259 1,113 2,425 2,828 3,372 3,888Balance Sheet AnalysisAccounts Receivable Turn 17.0 7.5 8.6 8.6 8.6 8.6Accounts Receivable Days 21.5 48.9 42.6 42.6 42.6 42.6Accounts Payable Turn 2.6 5.3 5.3 5.3 5.3 5.3Days Payable Outstanding 138.4 69.3 69.0 69.0 69.0 69.0Income Tax Receivable as % of sales 9.3% 6.1% 0.4% 0.4% 0.4% 0.4%Deferred Tax Assets as % of sales 0.0% 4.1% 2.4% 2.3% 2.2% 2.2%Other Current Assets as % of sales 2.5% 4.1% 3.5% 3.2% 3.2% 3.2%Other Intangible Assets as % of sales 0.9% 7.4% 3.8% 3.5% 3.5% 3.5%Other L-T Assets as % of sales 0.7% 2.2% 2.9% 2.6% 2.5% 2.5%Other Current Liabilities as % of sales 28.8% 13.2% 9.9% 9.2% 9.2% 9.2%Deferred Revenue as % of sales 146.6% 68.4% 42.5% 39.9% 39.9% 39.9%L-T Deferred Revenue as % of sales 37.6% 9.5% 2.2% 2.1% 2.1% 2.1% © Investors’ Mosaic, Inc.Other Non-Current Liabilities as % of sales 0.0% 6.5% 6.2% 5.9% 6.0% 6.0% www.investorsmosaic.com
    • Cash FlowCASH FLOW STATEMENT 2008 2009 2010 2011E 2012E 2013E 2014ENet Income (22.1) (52.8) 90.6 46.0 58.9 119.2 171.6D&A 2.9 10.4 39.5 89.1 119.7 151.7 163.7Stock-Based Comp Expense 0.7 3.7 23.8 77.7 122.0 170.0 195.0Impairment of Purchased Technology 1.9 - - - - - -Loss on Equity Method - 0.1 0.6 - - - -Gains on Sale of Investments - - - (1.4) - - -Common Stock Warrants - 0.3 1.9 15.6 - - -Accretion & Amortization (0.0) 0.1 1.7 2.2 - - -Excess Tax Benefits - - (39.7) 2.0 - - -Benefits of Deferred Income Taxes - - (8.5) - - - -Accounts Receivable (2.8) (4.4) (69.5) (56.0) (50.8) (49.5) (29.2)Income Tax Receivable (0.8) (10.5) (25.3) 32.2 (1.3) (1.5) (0.9)Other Assets (0.3) (3.1) (32.5) (48.3) (37.2) (48.4) (28.8)Accounts Payable 4.9 16.2 10.6 24.7 15.9 12.0 6.4Deferred Revenue 16.5 206.6 241.4 57.1 151.2 178.2 105.3Other Liabilities 10.5 24.3 91.8 63.3 54.9 64.2 37.9Cash From Operations 11.5 191.0 326.4 304.3 433.4 596.0 621.0Purchase of Marketable Securities (10.0) (125.1) (804.5) (512.6) - - -Sales of Marketable Securities - - 4.2 12.6 - - -Maturities of Marketable Securities - 62.4 319.8 725.3 - - -Capex (4.6) (38.8) (56.8) (247.7) (240.0) (260.0) (300.0)Acquisition of Purchased Technology (6.0) (0.6) (1.1) (3.7) - - -Business Acquisitions - (0.5) (62.3) (38.0) - - -Restricted Cash (0.2) (0.5) (16.5) (7.7) - - -Repayment of Employee Receivable 0.1 - - - - - -Proceeds from Sale of Investment - - - 2.0 - - -Other Investing Activities (0.5) (0.2) (0.3) (0.9) - - -Cash Used in Investing (21.2) (103.4) (617.4) (70.6) (240.0) (260.0) (300.0)Proceeds from IPO - - - 816.4 - - -Repurchase of Common Stock (0.0) - (1.5) (283.8) - - -Exercise of Stock Options 0.0 0.0 3.4 2.2 - - -Excess Tax Benefits from Options - - 39.7 (2.0) - - -Proceeds from Preferred Stock 29.5 14.2 305.2 485.3 - - -Exercise of Warrants - - - 0.0 - - -Proceeds from Contigent Warrant - - 4.6 - - - -Cash From Financing 29.5 14.2 351.4 1,018.1 - - - © Investors’ Mosaic, Inc.Effect of Exchange Rate - - 0.1 0.0 - - - www.investorsmosaic.comChange in Cash 19.9 101.8 60.5 1,251.8 193.4 336.0 321.0
    • Valuation © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Our Valuation Analysis Suggests $9.25 is a Fair Price for the Stock Right Nowase (15% discount rate) Base Case (15% discount rate) 2011 2011 2012 2012 2013 2013 2014 2014 Multiple Multiple Revenue 5.5x 5.5x5.5x 5.5x5.5x 5.5x5.5x 5.5xMarket Cap Implied Market Cap 6,422 6,422 8,816 8,816 11,149 11,149 12,527 12,527Outstanding (in millions)(in millions) Shares Outstanding 714 714 741 741 787 787 810 810re Per Share $ 8.99 $ 8.99 $ $ 11.90 $ $ 14.17 $ $ 11.90 14.17 15.46 15.46 NPV $ 8.99 $ 8.99 $ $ 10.34 $ $ 10.72 $ $ 10.34 10.72 10.17 10.17 Average Average $ 9.58 $ 9.58A Multiple Multiple EBITDA 15.0x 15.0x 15.0x 15.0x 15.0x 15.0x 15.0x 15.0xEnterprise Value Implied Enterprise Value 4,844 4,844 5,012 5,012 7,257 7,257 9,004 9,004 Implied ValuationValuation Implied sh Plus: Cash 1,440 1,440 1,633 1,633 1,969 1,969 2,290 2,290 Stock Price Stock Price $ 9.28 $Market Cap Implied Market Cap 6,284 6,284 6,645 6,645 9,226 9,226 11,295 11,295 Market Cap (in Billions) Billions) 6,630 Market Cap (inOutstanding (in millions)(in millions) Shares Outstanding 714 714 741 741 787 787 810 810re Per Share $ 8.80 $ 8.808.97 $ 8.97 $ $ 11.73 $ $ $ 11.73 13.94 13.94 NPV $ 8.80 $ 8.807.80 $ 7.808.87 $ 8.879.17 $ $ $ $ 9.17 Average Average $ 8.98 $ 8.98 Multiple Multiple Earnings 30.0x 30.0x 30.0x 30.0x 30.0x 30.0xMarket Cap Implied Market Cap 1,870 1,870 3,540 3,540 5,091 5,091Outstanding (in millions)(in millions) Shares Outstanding 741 741 787 787 810 810re Per Share $ 2.52 $ 2.524.50 $ 4.506.28 $ $ $ 6.28 NPV $ 2.19 $ 2.193.40 $ 3.404.13 $ $ $ 4.13 © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Bull Case & Bear CaseUpside Case (15% discount rate) 2011 2012 2013 2014Revenue Multiple 6.5x 6.5x 6.5x 6.5xImplied Market Cap 7,590 10,419 13,176 14,805Shares Outstanding (in millions) 714 741 787 810Per Share $ 10.63 $ 14.06 $ 16.75 $ 18.27NPV $ 10.63 $ 12.22 $ 12.67 $ 12.01 Average $ 11.32EBITDA Multiple 20.0x 20.0x 20.0x 20.0xImplied Enterprise Value 6,459 6,683 9,676 12,006 Implied ValuationPlus: Cash 1,440 1,633 1,969 2,290 Stock Price $ 11.33Implied Market Cap 7,898 8,316 11,645 14,296 Market Cap (in Billions) 8,092Shares Outstanding (in millions) 714 741 787 810Per Share $ 11.06 $ 11.22 $ 14.80 $ 17.64NPV $ 11.06 $ 9.76 $ 11.19 $ 11.60 Average $ 11.33Earnings Multiple 40.0x 40.0x 40.0xImplied Market Cap 2,494 4,721 6,788Shares Outstanding (in millions) 741 787 810Per Share $ 3.36 $ 6.00 $ 8.38NPV $ 2.93 $ 4.54 $ 5.51Downside Case (15% discount rate) 2011 2012 2013 2014Revenue Multiple 4.0x 4.0x 4.0x 4.0xImplied Market Cap 4,670 6,412 8,109 9,111Shares Outstanding (in millions) 714 741 787 810Per Share $ 6.54 $ 8.65 $ 10.31 $ 11.24NPV $ 6.54 $ 7.52 $ 7.79 $ 7.39 Average $ 6.97EBITDA Multiple 12.0x 12.0x 12.0x 12.0xImplied Enterprise Value 3,875 4,010 5,806 7,204 Implied ValuationPlus: Cash 1,440 1,633 1,969 2,290 Stock Price $ 7.27Implied Market Cap 5,315 5,643 7,775 9,494 Market Cap (in Billions) 5,194Shares Outstanding (in millions) 714 741 787 810Per Share $ 7.44 $ 7.61 $ 9.88 $ 11.72NPV $ 7.44 $ 6.62 $ 7.47 $ 7.70 Average $ 7.57Earnings Multiple 20.0x 20.0x 20.0x 20.0xImplied Market Cap 1,545 1,247 2,360 3,394Shares Outstanding (in millions) 714 741 787 810Per Share $ 2.16 $ 1.68 $ 3.00 $ 4.19 © Investors’ Mosaic, Inc.NPV $ 1.88 $ 1.46 $ 2.27 $ 2.75 www.investorsmosaic.com
    • Valuation Comparisons Market Cap EV Price / Price / Price / PEG 12 Revenue 12 EPS Price / TTM Gross EBITDA Operating Stock Price ($ in BN) ($ in BN) 2011 Sales 2012 Sales 2012 EPS Ratio Growth Growth EBITDA Margin Margin Margin ROA ROEGoogle $ 627.68 203.41 167.34 6.9x 5.7x 14.3x 0.8 23% 19% 12.4x 26.8% 45.9% 32.8% 12.0% 19.5%Amazon $ 197.22 89.69 82.91 1.8x 1.4x 96.2x 1.4 33% 69% 47.4x 2.0% 3.6% 2.5% 4.1% 12.3%Salesforce $ 124.76 16.97 16.90 7.5x 5.8x 76.5x 3.4 29% 23% 185.9x 0.2% 4.0% -1.4% -0.6% 0.3%Red Hat $ 51.91 10.01 9.05 8.9x 7.7x 44.8x 4.3 15% 10% 40.1x 12.9% 20.0% 17.1% 5.2% 10.4%LinkedIn $ 72.95 7.12 6.44 14.1x 9.0x 291.8x 0.4 56% 733% 120.8x 2.4% 10.5% 5.3% 3.6% 4.0%Tibco $ 28.69 4.63 4.40 5.1x 4.5x 25.8x 1.4 12% 18% 22.8x 11.2% 21.2% 16.5% 7.5% 12.2%Pandora $ 11.04 1.78 1.68 6.5x 4.3x 0 nm 51% -50% nm -3.9% -180.5% -1.7% -2.0% -12.6%Zillow $ 23.10 0.64 0.54 9.9x 6.7x 77.0x 0.6 48% 131% 124.5x -0.6% 6.7% 2.8% N/A N/AHomeaway $ 24.84 2.00 1.86 8.7x 6.9x 43.6x 2.0 25% 21% 51.6x 2.2% 15.7% 9.2% N/A N/AGroupon $ 19.35 12.34 11.90 7.7x 5.2x 138.2x nm 49% -122% nm -40.9% -22.8% -30.5% N/A N/AGreen Mountain $ 57.71 8.92 9.68 2.1x 1.6x 15.9x 0.4 32% 41% 19.6x 7.5% 11.6% 14.3% 10.4% 15.3%Lululemon $ 48.17 6.91 6.66 7.2x 5.6x 32.8x 1.3 29% 26% 24.6x 18.9% 28.1% 27.9% 28.9% 38.8%Rackspace $ 43.21 5.66 5.70 5.5x 4.4x 54.0x 1.1 27% 51% 21.0x 6.8% 26.6% 11.2% 7.7% 13.5%Equinix $ 103.19 4.89 6.90 3.1x 2.6x 38.5x 1.0 18% 40% 11.2x 5.9% 38.6% 18.7% 3.5% 4.6%VM Ware $ 97.95 41.35 37.46 11.0x 9.1x 39.0x 2.3 20% 17% 43.2x 18.2% 23.1% 18.4% 5.9% 16.1%EMC $ 23.90 48.74 46.73 2.4x 2.2x 13.9x 0.9 11% 15% 10.5x 11.7% 22.4% 17.7% 7.0% 13.2%NetSuite $ 47.10 3.20 3.09 13.6x 10.9x 224.3x 5.6 25% 40% nm -13.8% -7.0% -12.9% -7.8% -27.6%Apple $ 393.86 366.06 339.32 2.6x 2.3x 10.1x 0.8 15% 12% 9.5x 24.0% 25.6% 31.2% 22.1% 41.7%Electronic Arts $ 23.01 7.61 6.56 1.8x 1.7x 18.6x 0.6 3% 33% 91.1x -7.5% 1.7% -2.8% -1.4% -11.2%Average 6.6x 5.1x 69.7x 1.7 27% 59% 52.3x 4.4% 5.0% 9.3% 6.6% 9.4% • It’s hard to anticipate how the market will treat Zynga in terms of valuation, but it’s definitely more akin to the high-tech, social media brethren such as LinkedIn, Groupon, Salesforce, and Pandora. However, Zynga reliance on Facebook will likely cap valuation to some degree (rightfully so). • We think a comparison against Electronic Arts or Take Two is unfair as Zynga is an entirely different business model that happens to sell games. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • The IPO Details © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Large Share Count and Huge Number ofPotentially Dilutive Shares Should be Noted The size of Zynga’s share count will make earnings leverage more muted than the market probably realizes. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Questions You Should Be Asking Management © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Questions We Want to Ask Management1) How are you planning on transitioning to Platform Z without upsetting Facebook? They surely won’t want to lose the 30% revenue split from you.2) How do you make sure that users do not get burn-out from games that are becoming increasingly formulaic?3) Please provide cohort data on your top 5 games (show how Bookings, Revenue, DAU, and MAU have performed since launch).4) Why are you building your own data centers? How much money will this require over the next two years? How much will is save over the L-T?5) How do you identify good development talent? How do you retain these employees in such a competitive environment?6) What is the implication of durable goods becoming a larger % of revenue than consumable goods? We would think that consumable goods are more attractive to Zynga.7) What is the implication of your estimate for the average life of a durable virtual good peaked in 2009 at 19 months, and declined from 18 in the 9M ending 2010 to 15 months in the 9M ending 2011?8) Why did Mr. Van Natta resign? He was the highest paid executive, so he must have been valuable.9) What game genres are not applicable to social gaming? © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Conclusion• Zynga is a gaming and data analytics company, focused on games that appeal to the mass market and incorporates social engagement.• The business model is a new paradigm in gaming, focused rapid iteration of new games and updates, viral adoption due to the Facebook platform, cross- marketing, and low-cost failures.• Zynga is obsessed with building repeatable and scalable processes. They have built their own statistical analysis system, which is enables them to make data-driven decisions to improve user monetization.• They are very dependent on a healthy relationship with Facebook. Approximately 93% of revenue came through FB platform.• In order to reduce their dependence on Facebook, Zynga is expanding internationally and onto additional platforms (Google + and Mobile).• The IPO price of $9.25 seems fair for the potential of the business, but also the risks it faces over the next 12-18 months as it attempts to reduce it’s reliance on Facebook.• We would like to see meaningful traction from new game releases and mobile expansion before getting more aggressive on valuation. © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Appendices © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • The Competition• Electronic Arts• Disney• Take Two Interactive• Tencent• Gree (Japan)• Nexon (Japan)• Crowdstar (private)• Vostu (private)• DeNA Co (mobile)• Rovi (mobile)• Gameloft (mobile)• Glu Mobile (mobile) © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Key Metrics Zynga is not Providing• Concurrent Users Statistics – How many people are on the system at the same time• Cohort analysis for each game: users, bookings, and revenue• Engineers to user base (this is a key metric for Facebook) – At FB, it’s 1M users per engineer © Investors’ Mosaic, Inc. www.investorsmosaic.com
    • Key Financial Metrics Descriptions• Bookings: Revenue collected in the current time period.• Daily Average Users (DAUs): The number of individuals who played one of our games during a particular day. Under this metric, an individual who plays two different games on the same day is counted as two DAUs. DAU is a measure of audience engagement.• Monthly Average Users (MAUs): The number of individuals who played a particular game in the 30-day period ending with the measurement date. Under this metric, an individual who plays two different games in the same 30-day period is counted as two MAUs. Similarly, an individual who plays the same game on two different platforms (e.g., web and mobile) or on two different social networks in a 30-day period would be counted as two MAUs. MAU is a measure of total game audience size.• Monthly Unique Users (MUUs): The number of unique individuals who played any of our games on a particular platform in the 30-day period ending with the measurement date. An individual who plays more than one of our games in a given 30-day period would be counted as a single MUU. MUU is a measure of total audience reach across our network of games.• Average Bookings per User (ABPU): Total bookings in a given period, divided by (i) the number of days in that period, divided by, (ii) the average DAUs during the period. ABPU is a measure of overall monetization across all of our players through the sale of virtual goods and advertising. © Investors’ Mosaic, Inc. www.investorsmosaic.com
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