Zynga Inc., creator of FarmVille and other social games, is fixing to reap a billion-dollar bumper crop from its initial public offering after company executives spend the next two weeks trying to convince potential investors that their 4-year-old firm is worth $9 billion or more.
The valuation of the San Francisco online game publisher, derived from documents filed Friday with the Securities and Exchange Commission, would put Zynga on par with Electronic Arts Inc., valued at $7.7 billion, even though EA’s revenue is roughly three times that of Zynga’s.
Zynga, which first signaled its IPO intentions in July, said it expected to sell its shares for $8.50 to $10 each, raising as much as $1.15 billion the week of Dec. 12, when the shares are scheduled to debut on the Nasdaq Stock Market. Zynga is issuing 100 million shares, with an option to sell an additional 15 million, for a combined total of 12.9% of the company, including options and shares granted to executives.
The amount Zynga reaps from its IPO depends on its performance during a road show for investors that kicks off Monday, when executives hope to drum up demand for its shares. The price, however, can fluctuate right up to the minute before its shares hit the trading floor.
Investors are likely to be concerned about the declining traffic for some of Zynga’s existing games, as well as its reliance on Facebook for the majority of its business. Although Zynga has been expanding its presence on other platforms, such as the Google+ social network and on mobile devices, it has not yet succeeded in replicating the same dominance it enjoys on Facebook.
“While Zynga is the big dog on Facebook, it has to nip at the heels of bigger competitors on other platforms,” said Billy Pidgeon, an analyst with M2Research. “And the growth we’re seeing is on those other platforms such as mobile.”
Zynga titles, for example, make up 4 of the top 10 applications on Facebook, according to measuring site AppData.com. On Apple Inc.'s iTunes, however, Zynga’s top free title, CityVille Hometown, ranks 16th.
The company will also be swimming against economic tides, with stock markets remaining volatile. Moreover, IPOs are rare in December, largely because mutual fund managers who are in the pool of potential buyers are loath to make risky bets that can upset their portfolios’ performance for the entire year.
Zynga’s games draw more than 150 million unique players a month, a figure that has consistently grown since the debut of its first game, Zynga Poker, in the fall of 2007. It wasn’t until mid-2009, when the publisher came out with FarmVille, that its games took off like rockets.
But traffic on many of those earlier blockbuster titles has since fallen off as players moved on to other games. In a 30-minute recorded presentation released online Friday, Zynga’s chief financial officer, David Wehner, pointed out that FarmVille’s revenue has continued to rise even as traffic eroded.
“That’s because we’re able to retain our most engaged and paying players,” while free players drift to other games, Wehner said.
Zynga’s IPO has been one of the most anticipated of the year, largely because it is the dominant player in the fast-growing market for social games. That market is expected to grow from $1 billion in 2010 to $5 billion by 2015, according to research firm Parks Associates.
“They’re a hot company in a hot sector,” said P.J. McNealy, a media analyst with Digital World Research. “And they’re hoping those two factors will help them overcome those macroeconomic challenges.”