Zynga Stock Analysis

The IPO Analysis
December 2011

© Investors’ Mosaic, Inc.
www.investorsmosaic.com

Table of Content

1) The Thesis
2) Risks That Need to Be Monitored
3) 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 Metrics
5) Analysis of Key Metrics and Financials
6) Financials
i. Income statement, balance sheet, cash flow
7) Valuation
1) Base case, Bull case, and Bear Case
2) Comparable Valuations
8) Questions We Would Be Asking Management
9) Conclusion
10) Appendices

Summary Thesis

Factor Impact Details

Powerful Business Model Favorable Rapid innovation, low-cost deployment, and
strong cash flow at maturity
Market Leader in Paradigm Favorable Focused on statistical analysis to improve
Shift of Social Gaming player engagement and monetization
Strong 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 low
Valuation Neutral $9.25 is a fair valuation, wait for a better entry
point as a few meaningful unknowns exist


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).

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 Facebook's 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.

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.


The Offering: Should You Participate?


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.

Zynga Has a Good “Story to Tell”, Which Investors Will Love

Source: 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


The Business Model
Cash paid by users and advertisers in the period
BOOKINGS

Virtual Goods
REVENUE
Advertising

COST 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 developers
DEVELOPMENT 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 teams
ADMINISTRATIVE Outside legal and consulting services; charitable donations

How Zynga Makes Money
NEW GAMES

EXISITING GAMES

MONTHLY UNIQUE USERS

DAILY ACTIVE USERS

UNIQUE PAYERS

BOOKINGS PER UNIQUE PAYER

BOOKINGS

Zynga-at-a-Glance


KEY METRICS

1) Monthly Unique Users: How many unique players per month
2) Monthly Average Users: How many games played per month
3) Daily Average Users: How many games played per day
4) Unique Payers: How many unique individuals paid for items
5) Bookings: Cash collected from virtual goods and advertising
6) Unique Bookings per Unique Payers: Bookings per unique payer
7) DAU as % of MAU: Indicates user engagement


Total Bookings Have Stalled, but Steady
Improvement in Underlying Trends


Zynga is Becoming Increasingly Effective at
Monetizing 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.

User Base Has Stagnated as Game Releases
Slowed 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.

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?

Zynga Games Have Some Longevity, and the
Company is Diversifying it’s Revenue Base
2008 2009 2010 9M 2010 9M 2011 % Change
Zynga Poker 14 39 120 80 124 55%
Mafia Wars 4 47 167 129 116 -10%
FarmVille - - 179 116 224 93%
FrontierVille - - - - 133 nm
CityVille - - - - 91 nm
Total for Top Games 18 86 466 325 688

Total Revenue 19 121 597 402 829
% of Total 93% 71% 78% 81% 83%

Revenues: 9M 2011


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, even
Source: VentureBeat. Zynga: Behind the IPO. http://bit.ly/ryiKbW though users
decline, bookings per
game climb for
several quarters.

Based on FarmVille, Games Monetize Over 2+ Years

Source: 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.

Financials

* See our website to download the full Excel file at
www.investorsmosaic.com (but be forewarned, this is premium content)


Summary Income Statement
ESTIMATES
2008 2009 2010 2011E 2012E 2013E 2014E
Revenue 19.4 121.5 597.5 1,167.6 1,603.0 2,027.1 2,277.7
Cost of Revenue 10.0 56.7 176.1 308.4 392.6 455.9 489.5
Gross profit 9.4 64.8 421.4 859.2 1,210.4 1,571.2 1,788.2

Research & Development 12.2 51.0 149.5 414.3 726.0 938.8 1,042.0
Sales & Marketing 11.0 42.3 114.2 170.1 223.8 265.5 286.8
General & Administrative 8.8 24.2 32.3 155.9 164.7 185.3 198.3
Total Operating Expenses 32.0 117.5 295.9 740.3 1,114.5 1,389.6 1,527.1

Operating Income (22.6) (52.8) 125.5 118.8 95.9 181.6 261.1
Interest Income (Expense) 0.3 0.2 1.2 1.6 1.5 1.5 2.5
Other Income (Expense) 0.2 (0.2) 0.4 (0.4) 0.4 0.3 0.5
Pre-tax Income (22.1) (52.8) 127.1 120.1 97.7 183.3 264.0

Taxes 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 58.9 119.2 171.6
Deemed 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 58.9 119.2 171.6

EPS $ (0.18) $ (0.31) $ 0.08 $ 0.02 $ 0.08 $ 0.15 $ 0.21

Adjusted EBITDA 4.5 168.2 392.7 322.9 334.1 483.8 600.3
Shares Outstanding 120.0 171.8 329.3 714.0 741.2 786.7 810.3


Margins
Summary Income Statement
2008 2009 2010 2011E 2012E 2013E 2014E
Margins
Gross 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 10
EBITDA 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 25
Operating 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%
25
Netbps 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 17
Incremental Gross Profit Margin 54.3% 74.9% 76.8% 80.7% 85.1% 86.6%
Incremental Gross Profit Margin
Incremental 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 Margin
Incremental 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 Revenue
As % of Revenue
Research & Development 62.6% 42.0% 25.0% 35.5% 45.3% 46.3% 45.8%
Research & Development
Sales & 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 & Marketing
General & 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 & Administrative
Total 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 % Change
YOY % Change
Bookings 562% 110% 39% 35% 26% 12%
Bookings
Revenue 562%
526% 110%
392% 39%
95% 35%
37% 26%
26% 12%
12%
Revenue
Gross profit 526%
589% 392%
551% 95%
104% 37%
41% 26%
30% 12%
14%
Gross profit Development
Research & 589%
320% 551%
193% 104%
177% 41%
75% 30%
29% 14%
11%
Research & Development
Sales & Marketing 320%
285% 193%
170% 177%
49% 75%
32% 29%
19% 11%
8%
Sales & Marketing
General & Administrative 285%
174% 170%
33% 49%
384% 32%
6% 19%
13% 8%
7%
General & Administrative
Total 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 EBITDA
Operating Income 3597%
134% 134%
-338% -18%
-5% 3%
-19% 45%
89% 24%
44%
Operating Income
Net 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 Count
Share 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 Sheet
BALANCE SHEET 2008 2009 2010 2011E 2012E 2013E 2014E
Cash & Equivalents 127 188 1,440 1,633 1,969 2,290
Marketable Securities 73 550 321 321 321 321
Accounts Receivable 7 80 136 187 236 266
Income Tax Receivable 11 37 4 6 7 8
Deferred Tax Assets - 24 28 36 46 51
Restricted Cash 1 3 4 4 4 4
Other Current Assets 3 24 40 52 66 74
Total Current Assets 222 906 1,974 2,239 2,649 3,014

L-T Marketable Securities - - 1 1 1 1
Goodwill - 60 95 95 95 95
Other Intangible Assets 1 44 44 56 70 79
PP&E 35 75 256 376 485 621
Restricted Cash - 14 21 21 21 21
Other L-T Assets 1 13 34 41 51 58
Total Assets 259 1,113 2,425 2,828 3,372 3,888

Accounts Payable 22 33 58 74 86 93
Other Current Liabilities 35 79 115 147 186 209
Deferred Revenue 178 408 496 640 809 909
Total Current Liabilities 235 521 670 862 1,082 1,211

L-T Deferred Revenue 46 57 26 34 42 48
L-T Deferred Taxes - 14 15 15 15 15
Other Non-Current Liabilities - 39 72 95 121 136
Total Liabilities 280 630 783 1,005 1,260 1,409

Shareholders' Equity (21) 482 1,642 1,823 2,112 2,479
Total Liabilities & Equity 259 1,113 2,425 2,828 3,372 3,888
Balance Sheet Analysis
Accounts Receivable Turn 17.0 7.5 8.6 8.6 8.6 8.6
Accounts Receivable Days 21.5 48.9 42.6 42.6 42.6 42.6
Accounts Payable Turn 2.6 5.3 5.3 5.3 5.3 5.3
Days Payable Outstanding 138.4 69.3 69.0 69.0 69.0 69.0

Income 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 Flow
CASH FLOW STATEMENT 2008 2009 2010 2011E 2012E 2013E 2014E
Net Income (22.1) (52.8) 90.6 46.0 58.9 119.2 171.6
D&A 2.9 10.4 39.5 89.1 119.7 151.7 163.7
Stock-Based Comp Expense 0.7 3.7 23.8 77.7 122.0 170.0 195.0
Impairment 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 6.4
Deferred Revenue 16.5 206.6 241.4 57.1 151.2 178.2 105.3
Other Liabilities 10.5 24.3 91.8 63.3 54.9 64.2 37.9
Cash From Operations 11.5 191.0 326.4 304.3 433.4 596.0 621.0

Purchase 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 - - -
Effect of Exchange Rate - - 0.1 0.0 - - -
Change in Cash 19.9 101.8 60.5 1,251.8 193.4 336.0 321.0

Valuation


Our Valuation Analysis Suggests $9.25 is a Fair Price
for the Stock Right Now

ase (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 5.5x
Market Cap
Implied Market Cap 6,422 6,422
8,816 8,816
11,149 11,149
12,527 12,527
Outstanding (in millions)(in millions)
Shares Outstanding 714 714 741 741 787 787 810 810
re 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
$ 9.58

A Multiple Multiple
EBITDA 15.0x 15.0x
15.0x 15.0x
15.0x 15.0x
15.0x 15.0x
Enterprise 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
6,645 6,645
9,226 9,226
11,295 11,295 Market Cap (in Billions) Billions) 6,630
Market Cap (in
Shares Outstanding 714 714 741 741 787 787 810 810
re 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 30.0x
Market Cap
3,540 3,540
5,091 5,091
Shares Outstanding 741 741 787 787 810 810
re Per Share $ 2.52 $ 2.524.50 $ 4.506.28
$ $ $ 6.28
NPV $ 2.19 $ 2.193.40 $ 3.404.13
$ $ $ 4.13


Bull Case & Bear Case
Upside Case (15% discount rate) 2011 2012 2013 2014
Revenue Multiple 6.5x 6.5x 6.5x 6.5x
Implied Market Cap 7,590 10,419 13,176 14,805
Shares Outstanding (in millions) 714 741 787 810
Per Share $ 10.63 $ 14.06 $ 16.75 $ 18.27
NPV $ 10.63 $ 12.22 $ 12.67 $ 12.01 Average $ 11.32

EBITDA Multiple 20.0x 20.0x 20.0x 20.0x
Implied Enterprise Value 6,459 6,683 9,676 12,006 Implied Valuation
Plus: Cash 1,440 1,633 1,969 2,290 Stock Price $ 11.33
Implied Market Cap 7,898 8,316 11,645 14,296 Market Cap (in Billions) 8,092
Per Share $ 11.06 $ 11.22 $ 14.80 $ 17.64
NPV $ 11.06 $ 9.76 $ 11.19 $ 11.60 Average $ 11.33

Earnings Multiple 40.0x 40.0x 40.0x
Implied Market Cap 2,494 4,721 6,788
Shares Outstanding (in millions) 741 787 810
Per Share $ 3.36 $ 6.00 $ 8.38
NPV $ 2.93 $ 4.54 $ 5.51

Downside Case (15% discount rate) 2011 2012 2013 2014
Revenue Multiple 4.0x 4.0x 4.0x 4.0x
Per Share $ 6.54 $ 8.65 $ 10.31 $ 11.24
NPV $ 6.54 $ 7.52 $ 7.79 $ 7.39 Average $ 6.97

EBITDA Multiple 12.0x 12.0x 12.0x 12.0x
Implied Enterprise Value 3,875 4,010 5,806 7,204 Implied Valuation
Plus: Cash 1,440 1,633 1,969 2,290 Stock Price $ 7.27
Implied Market Cap 5,315 5,643 7,775 9,494 Market Cap (in Billions) 5,194
Per Share $ 7.44 $ 7.61 $ 9.88 $ 11.72
NPV $ 7.44 $ 6.62 $ 7.47 $ 7.70 Average $ 7.57

Earnings Multiple 20.0x 20.0x 20.0x 20.0x
Per 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 ROE

Google $ 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/A
Homeaway $ 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/A
Groupon $ 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/A
Green 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.

The IPO Details


Large Share Count and Huge Number of
Potentially Dilutive Shares Should be Noted

The size of Zynga’s
share count will make
earnings leverage
more muted than the
market probably
realizes.


Questions You Should Be Asking Management


Questions We Want to Ask Management
1) 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?

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.

Appendices


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)


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


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.


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Zynga Stock Analysis

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