When Games Meet Reality: Is Zynga Overvalued?

RC working paper No. 12-003

28 Pages Posted: 20 Dec 2012

See all articles by Zalàn Forrò

Zalàn Forrò

Independent

Peter Cauwels

ETH Zurich; Director Quaerens CommV

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute

Date Written: June 5, 2012

Abstract

On December 16th, 2011, Zynga, the well-known social game developing company went public. This event followed other recent IPOs in the world of social networking companies, such as Groupon or Linkedin among others. With a valuation close to 7 billion USD at the time when it went public, Zynga became one of the biggest web IPOs since Google. This recent enthusiasm for social networking companies raises the question whether they are overvalued. Indeed, during the few months since its IPO, Zynga showed significant variability, its market capitalization going from 5.6 to 10.2 billion USD, hinting at a possible irrational behavior from the market. To bring substance to the debate, we propose a two-tiered approach to compute the intrinsic value of Zynga. First, we introduce a new model to forecast its user base, based on the individual dynamics of its major games. Next, we model the revenues per user using a logistic function, a standard model for growth in competition. This allows us to bracket the valuation of Zynga using three different scenarios: 3.4, 4.0 and 4.8 billion USD in the base case, high growth and extreme growth scenario respectively. This suggests that Zynga has been overpriced ever since its IPO. Finally, we propose an investment strategy (dated April 19th, 2012 on the arXiv), which is based on our diagnostic of a bubble for Zynga and how this herding / bubbly sentiment can be expected to play together with two important coming events (the quarterly financial result announcement around April 26th, 2012 followed by the end of a first lock-up period around April 30th, 2012). On the long term, our analysis indicates that Zynga's price should decrease significantly. The paper ends with a post-mortem analysis added on May 24th, 2012, just before going to press, showing that we have successfully predicted the downward trend of Zynga. Since April 27th, 2012, Zynga dropped 25%.

Keywords: Zynga, valuation, social-networks, IPO, growth in competition, bubble, Facebook, lock-up, The Journal of Investment Strategies

Suggested Citation

Forrò, Zalàn and Cauwels, Peter and Sornette, Didier, When Games Meet Reality: Is Zynga Overvalued? (June 5, 2012). RC working paper No. 12-003. Available at SSRN: https://ssrn.com/abstract=2191602 or http://dx.doi.org/10.2139/ssrn.2191602

Zalàn Forrò (Contact Author)

Independent ( email )

No Address Available

Peter Cauwels

ETH Zurich

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Director Quaerens CommV ( email )

Bruges
Belgium

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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