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Summary:

Former equity analysts at Second Shares estimate that social-gaming market leader Zynga would be worth as much as $5 billion if its shares were publicly traded. They say the company will likely have revenue of close to $500 million this year from games such as Farmville.

Zynga, the leading social gaming company behind Facebook hits such as Farmville and Mafia Wars, would likely be worth as much as $5 billion if it were publicly traded instead of privately held, according to SecondShares.com, a group of former equity analysts who spend their time researching the value of private online companies such as Zynga, Facebook, Twitter and LinkedIn. SecondShares based its estimate of Zynga’s value on the number of outstanding shares, estimated revenue per user, growth rate and other metrics, and projected that by 2015 the game maker could have a theoretical market value as high as $10 billion.

Given the pent-up demand that such private companies represent, there’s a lot of interest in valuing them — since there is a chance they could go public someday — and also in trading their shares through secondary markets, although Facebook recently barred its employees from selling their stock through such vehicles.

The authors of the Zynga report — former Merrill Lynch and Goldman Sachs equity analyst Lou Kerner, former Sanford Bernstein research analyst Eli Halliwell and Gamers Media CEO Jay Gould — say Zynga is the leader in the social gaming market with 237 million monthly active users and six of the top seven social games. That gives the company more than four times as many monthly active users as Playfish, which was recently bought by Electronic Arts for $400 million. China’s Tencent Holdings is the only online game company that is larger than Zynga, the report says, with 400 million monthly active users.

Based on an estimate of what Zynga likely makes in revenue from the average user, Second Shares projects that the company will pull in about $500 million in revenue this year, and could be making as much as $1.6 billion per year in five years. The analysts say that shares of the company are currently trading in private, illiquid markets at about $9 a share, but would likely be worth almost twice as much if Zynga were to go public, and that Zynga has a number of strengths that justify a premium valuation, including the fact that it can cross-market games to users of other Zynga games, and that it’s quickly able to duplicate other successful games that competitors come up with. From the report:

As with Facebook, Twitter, and other high profile private companies, you can buy Zynga shares in the (illiquid) private market, where about $6 million worth of shares traded hands last year through marketplaces like SecondMarket.com. Only accredited investors are allowed to participate. Currently, the ask price is about $9/share, implying a market cap for Zynga of $2.8 billion.

Toward the end of its research report, however, Second Shares mentions a number of potential risks for Zynga and its valuation, including:

  • Farmville currently accounts for an estimated 50 percent of the company’s revenue, and “appears to have peaked in terms of popularity.”
  • Facebook blocked applications from providing notifications in newsfeeds last month, removing “a major source of free advertising.”
  • Four of Zynga’s six major game hits “appear to have peaked or to be in decline.”
  • Zynga is dependent on Facebook, and growth at the social network could slow, or the network could harm Zynga somehow.
  • Online gaming is a risky, hit-driven business, and there are a lot of competitors.

In February, a research firm called Next Up estimated that Zynga was worth as much as $3 billion, in a report it did for private share-trading site SharesPost.com, where Zynga is currently valued at $2.6 billion. Russian investment firm Digital Sky Technologies invested $180 million in Zynga in December.

In November, an analyst at Pacific Crest Securities said Zynga could be worth as much as $1 billion, given the $400 million that Electronic Arts paid for Playfish. At that point, Inside Social Games estimated that Zynga would have revenue of $210 million for 2009 and $355 million this year, and a statement from the company said that 1 million of its 200 million active monthly users were buying virtual goods.

Related content from GigaOM Pro (sub req’d):

How the Next Zynga Could Reinvent Social Gaming

Post and thumbnail photos courtesy of Flickr user Amanda Bake It Pretty

  1. Zynga’s current valuation in the secondary market (SharesPost) is $2.61bn, more than $1.1bn more than Twitter, valued at $1.48bn.

    Facebook stands at $13.4bn. Zynga has almost 20% of Facebook’s valuation. That’s a fat pie for Facebook to go after in one way or another.
    (http://www.siliconvalleywatcher.com/mt/archives/2010/03/sharespost_face.php)

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  2. ppears to have peaked in terms of popularity.”

    http://www.vipmbt.com

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  3. You have to wonder then why aren’t they going public? Have the VC’s “missed” the exit?

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    1. I wondered that too, Peter — if Zynga really is that valuable, it may be too big for many other gaming companies to acquire (unless someone like Google wants to). An IPO might be the only practical option at this point, but CEO Mark Pincus has said he’s not interested.

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  4. I don’t use it. I turned off the notices on FB from friends – found them annoying. If it disappeared tomorrow, I would not care.

    Pincus and Bing Gordon did a talk at Stanford on “building hi-tech skyscrapers” – basically the notion that one should strive to build these businesses of substance that stand out and last.

    Is Zynga with Mafia Wars and Farmville a hi-tech skyscraper?

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    1. That’s a good question, Jake.

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  5. Pretty crazy to think that making those type of games, without any significant graphics or real game play could net them that amount of cash. Given those numbers, why not take it public? Seems like it would be a good time to cash out and enjoy life.

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  6. I have to wonder if the analyst are missing the bigger picture in all of this. I see all over the internet that Zynga are the gods of social networking, but here is what the analyst’s fail to mention. Tagged is now gone, Yahoo no updates, Bebo no updates, Sonico no updates, and soon that list will include Myspace. What I see is a company riding out 1 social platform. That being Facebook. Then you look at the writing on the wall that Facebook wants a 30% cut of the pie for virtual goods. You have maxed out Farmville and also Mafia Wars so what is left with that making up 65% of their sales. The facts of a dropping market base are shown in Zynga declining DAU from 4 of its top 7 applications. This article also shows that from November til April that the company has grown 1 billion dollars a month in worth with all the above mentioned? I am really lost at how analyst do their job. The last random thing to leave you with. Why is a company that is doing so well marking down virtual goods in every game they produce? Why are they pulling the plug on so many social networks? They have vacuumed the pockets of all the social networks they could. Where do they go now?

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  7. the difference btween a mmorpg and Zynga is simply the audience. Zynga has casual gamers…mmorpg no. MMorpg can count on 15$ per user but less users…zynga on 2,5$ and a huge amount of users. but the principle is the same…so don’t considera zynga as elvil. for italians: http://bit.ly/cmmFpF.

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  8. I seem to recall BlueMountain sold for just under $1B back in 1999. Two years later, when the bubble burst, it was sold again for $35M. Can someone explain how a company that deals in 90% free content/services can be worth over $1B when loads of sites that actually have a revenue stream get nary a mention?

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  9. This is very interesting. If you consider there are over 16 million people playing Mafia Wars alone, imagine how many of them are spending money on “Godfather Points” and other useless stuff in the “marketplace”. I know a lot of people who buy them on a regular basis. It costs $150 for just 700 godfather points which lasts about 10 minutes. It doesn’t take long to add up to a lot of money. This probably has nothing to do with this article but it’s amazing how much money they must make from a game/application. It blows my mind….

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  10. [...] Zynga Could Be Worth $5 Billion [...]

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