Is Zynga’s $15-$20 Billion IPO Valuation Crazy? Maybe Not

When Zynga, the booming online video game company, goes public over the next few months, it could find itself valued at $15 billion to $20 billion, or nearly three times the market capitalization of Electronic Arts (NSDQ: ERTS), the 30-year-old video game giant. Is that nuts? Well, Zynga is growing like a weed, and unlike some of its internet IPO brethren, the company actually makes a substantial profit.

Zynga plans to file IPO documents with the Securities and Exchange Commission as early as this Wednesday, according to CNBC. The company hopes to raise $1.5 billion to $2 billion in the offering, according to the report, which could imply a valuation of $15 billion to $20 billion if Zynga follows the example of recent internet offerings, such as LinkedIn (NYSE: LNKD), and only floats 10 percent of its shares to the public.

Morgan Stanley, which has become the go-to Wall Street bank for internet IPOs, will be the lead banker, with Goldman Sachs also participating. Unlike Demand Media (NYSE: DMD), which has already gone public this year, Zynga is profitable. And not just in a nominal sense, like LinkedIn, which earned just $15 million on $240 million last year.

As recently as March, Zynga was projecting a 2011 profit of $630 million on revenue of $1.8 billion, according to a New York Post report that cited a prospective investor who had seen Zynga’s financials. Zynga makes money by selling virtual currency for use in its games. Users pay to replenish their “energy,” which allows them to participate more fully in games. The company has about 250 million users.

The public won’t get a glimpse of Zynga’s financial details until the company files its S-1 registration with the SEC, which could come as early as Wednesday. Given Zynga’s rapid growth, which mirrors that of other hot internet firms like Groupon, Facebook and Twitter, it’s entirely possible that the company could raise its revenue forecast.

A $15 billion valuation would mean Zynga is worth 23 times its 2011 earnings (using the $630 figure), which is not unreasonable for such a fast-growing company. Even at $20 billion, the company would be worth only 31 times 2011 earnings, which would be high for a mature company with slower growth, but is still reasonable for Zynga.

Zynga is currently valued at about $14 billion on private secondary market SharesPost. As recently as February, the company as talking to potential investors about raising $200 million at a valuation of $7-9 billion. Zynga has already raised over $500 million from the likes of Union Square Ventures, Kleiner Perkins Caufield & Byers, Andreessen Horowitz and Google.

Facebook, the dominant social-networking company, is expected to go public next year at a valuation of over $100 billion.