Say What? Yes, You Heard Right – Zynga Could Be Worth $5 Billion

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

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