Zynga prepares investor pitches, adjusts to $7B value

Social gaming company kicks off IPO roadshow, doesn't want to be the next Groupon

Monday will mark the first day of the nine-day road show to entice tech investors to bite at the projected $10 billion social gaming site's initial public offering.

Zynga has been struggling to keep buzz about its efforts to raise funding positive, especially as the company has been revalued several times in the process.

Zynga initially filed papers with the SEC in July and investment professionals have changed their valuation of the company several times -- starting at $10 billion, then jumping closer to $20 billion, down to $14 billion, then $10 billion again -- and now that the IPO is expected on the Dec. 15, Zynga is being valued, at closer to $7 billion. This amended valuation is seven times the companies revenue over the last 12 months. (Read: Bambi Francisco noted in an ealier commentary piece that Zynga's IPO would not go out at the estimated $20 billion.)

The price range expected for trading, according to the latest Friday morning SEC filing, will be between $8.50 and $10 per share.

Offering 100 million shares, Zynga aims to raise over $1 billion. Zynga plans to list on the Nasdaq under the symbol ‘ZNGA.’ At the high end of the range, Zynga would be valued at around $7 billion.

Pricing a company on the cusp of IPO is no clear-cut task, and when you add the fire of being the next hot offering, everyone has an opinion.

I spoke with Lou Kerner, a social media analyst with the trading service Liquidnet, he explained that investment bankers that set out to value these hot IPOs have "a tough job ahead of them in valuing these companies." While investment banks want to be fair and encouraging to the companies they are valuing (to assure that the price is set to put their shares in the hands of the long-term shareholders), they also cater to their best clients, the hedgefunders (that, by their nature, want the shares priced so that they will jump in early trading.)

Because of the recent buzz over the newly public LinkedIn and Groupon, pricing Zynga must be weighed carefully so that they capture the ideal 10-30% growth can be captured the first few weeks of trading.

"Groupon saw massive demand for shares in the early days of trading, which made people think that it was priced below value," said Kerner. "But now that it has been trading lower and the market has had time to steady out, people now talk about it being over priced -- and people don't want Zynga to fall to the same fate."

Currently, the gaming giant Electronic Arts Inc. has a market value of $7.6+ billion and has built an empire on gaming consoles and multiple platforms, which still leaves many scratching their heads on how the digital social gaming company that is so dependent on Facebook could be valued higher -- and there are no clear answers.

With the San Francisco-based company looking to open its IPO in a matter of days, it is time for them to drum up the desire for at least 100 million shares from investors looking to hold on for more than the enticing first few moments of trading.

Questioning the revenue

While Zynga is running a profitable business model, investors and competitors are questioning how much more growth it can experience with its dependance on the Facebook platform and its credit system.

Zynga has amended its SEC filing several times to change the way it is calculating its usership and revenue model, thus raising red flag to investors. Despite amendments, the company has gained revenue but the trend of growth is what has been slowing in recent quarters.

Zynga has seen growth in annual revenue from $19.4 million in 2008 to $597.5 million in 2010. Even the first nine months of 2011 showed the continued growth, but at a slowing pace, when the company generated revenue of $828.9 million.  

With Facebook pocketing 30% of the virtual credits purchased on its platform and amending its gaming system to cost developers an arm and a leg to perform on the site, Zynga has been fighting to prove that it has legs and can bring its users to the other screens that players work on.

Zynga’s games have somewhere in the range of 54 million daily active users and 227 million monthly active users in 175 countries -- but, again, mostly via Facebook.

A recent study by XyoLogic, an application data collector, showed that Zynga is failing to penetrate the new hot space of gaming: mobile.  The only two games that have shown sustained market success on mobile applications have been Words with Friends and Hanging With Friends, both of which are far less competitive on the in-app purchasing front and are two-person games compared to the multi-player environments of the CastleVille and FarmVille games.

In order for Zynga to pull ahead in this public debut, it will need to really sell up the stickiness of its usership and the elastic nature of the in-app purchasing credits that its players are willing to dole out for more bridge-building material and food for its virtual hens, because that is the company's strength. Social gamers are willing to pay to play and willing to watch ads for credits.

Virally, Zynga has a lot of strength, as long as they learn how to leverage it through sophomore slumps. One of the greatest facts working against the company is that it hasn't been tested by the greatest factor of all -- time. I have no doubt that Zynga has the tenacity to get growth back on track and find more revenue to support it, but that does;t mean it won't see some sporadic action the first few days of trading.

If Zynga can get investors on board for the long-haul and ramp up its mobile usership it will likely be more successful than LinkedIn, but if not it would easily slip below Groupon standards, possibly just as quickly too.

Image Sources -- 4rumors.com, Articles.sfgate.com and Socialtimes.com