Well, here’s a man who is trying to get out in front of the pack.
Sterne Agee analyst Arvind Bhatia this morning launched coverage of Zynga with an Underperform rating and $7 price target. The company is expected to price an initial public offering later this week at $8.50 to $10 a share.
Bhatia writes that his $7 target is based on a “healthy” multiple of 11x enterprise value/estimates 2012 EBITDA, a 30% premium to its peers.
“While we believe in the potential for social games, we think Zynga’s growth is slowing even faster than what is obvious at first, its margins are under pressure, and free cash flow has been declining recently; thus we believe the implied valuation in the IPO is not justified,” he writes.
The analyst asserts that Farmville, the company’s flagship game, “has peaked,” and that other titles “are coming on line at a much slower pace.”
“Cityville, currently Zynga’s best title in terms of traffic, is tracking, by our estimates, 50% below Farmville at the same point in its history,” he writes. “Castleville (released 11/15), the new title in the “Ville” series, is averaging DAUs [daily average users] 50% below Cityville at the same point. The picture with Mafia Wars 2 (released in early October this year) appears quite dismal with DAUs having already declined to less than 1 million from 28 million reached 2 weeks after launch. This also implies, perhaps, that sequels in social gaming are not a guaranteed success. Zynga Poker, the company’s oldest title, seems relatively stable but is also past its peak.”
For 2012, he expects two new Zynga titles on Facebook: Hidden Chronicles and Zynga Bingo. “Also, we expect ZNGA to grow its mobile business and expand its overall reach internationally. All said, we expect bookings (a measure of cash-based revenue) growth to slow to 20% and 17% in 2012 and 2013, respectively, versus growth of 156% in 2010 and (estimated) 37% in 2011.”
Bhatia adds that “another bear argument is that Zynga is overly dependent on the Facebook platform (94% of revenue is generated on Facebook).” He says that “a slowdown or disruption in the growth of Facebook, or Facebook policy changes, will negatively impact Zynga (and it did in 2010). Bears also would argue that barriers to entry in social gaming aren’t really that high.”
Zynga’s stock…well, for a quote, you’ll likely have to wait until Thursday or Friday.
Update: Morningstar Rick Summer on Friday issued a similarly cautious report, putting fair value of the stock at $6 a share. He notes that at $9.25 – the middle of the price talk range – the stock would trade for 92x his estimated 2012 EPS and 40x expected EBTIDA. Why he thinks there is a strong possibility of a first-day pop in the stock, he cautions that the valuation makes the stock a risky bet for long-term investors. “Zynga is one of the best positioned companies in the market for social gaming outside of Asia. We laud its Facebook platform dominance and its strong suite of social games, though we question Zynga’s ability to sustain bookings growth, particularly as gamers increasingly engage with smartphones and tablets, where the firm has been less successful,” he writes.
source: forbes.com
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