Given the speculation surrounding Zyngas IPO, we wanted to share our preliminary thoughts on the outlook for Zynga. The company will reportedly file its S-1 documents soon, which will reveal important data for our analysis. We will outline some of these factors in a subsequent note, but in the meantime, you can see our preliminary valuation here.
Below we highlight what we view as some of the key opportunities and risks when assessing the companys outlook.
Zyngas Big Opportunities
1. Near term growth of active Zynga user base as Facebook continues to grow
- About 270 million monthly active Zynga users
- Bulk of users come via Facebook
- Facebook is estimated to have about 750 million users currently
- Long term, we estimate that Facebooks user base will exceed 2 billion
2. Growing presence on smartphones
- 5+ billion mobile phone users worldwide currently with smartphone penetration rising
- US smartphone users expected to surpass feature phone users in 2011
- More than 1 billion smartphones sold by 2015, according to research firm IDC
- AT&T and Zynga announced a partnership in which select Zynga games will be made available in AT&Ts self in the Android app market
3. Large tablet opportunity
- About 15 million iPads sold in 2010, 31 million expected for 2011 (Trefis estimates)
- RIM, Samsung, HP, Dell and others are jumping into the tablet market
- Tablets are a prime opportunity for game presence outside of Zyngas core Facebook dependent business
4. Growing revenue per user with ads, virtual items and other features
- Growing in game ad revenues and monetizing non-paying users in other ways (surveys, market research)
- Increasing the percentage of users that pay for in game items or virtual gifts
5. Profit margins expanding with scale
- Margins could grow significantly with scale if Zynga can keep game development costs low while increasing its user base
Zyngas Risks
1. Dependence on a few popular game titles
- A few key games drive the bulk of activity and revenues for Zynga
2. Declining revenue per user
- As Zynga user base becomes more international, the average revenue per user may fall as many international regions have lower monetization rates
3. Slowing user growth as Facebook growth slows; inability to grow beyond Facebook
- Zynga needs to broaden distribution beyond Facebook
5. Margins shrink as company develops more complicated games
- Game makers like Electronic Arts and Activision Blizzard have operating margins of 10% or lower
See our thoughts on Zyngas valuation here.
Stay Tuned for the Full Trefis Analysis on Zynga
Trefis will launch its coverage of Zynga before the companys IPO. Make sure youre registered with Trefis (its free) to receive Zynga coverage details in advance.
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