Why Zynga is worth $14

Mobile gaming, online gambling and the company's online platform are top growth drivers.

By Trefis Jun 4, 2012 9:42AM
TrefisZynga (ZNGA) is the world's largest social gaming company, with about 270 million active monthly users. Its most popular offerings include FarmVille, CityVille, Texas HoldEm Poker and Mafia Wars.

Zynga is much larger than any of its competitors and has an active user base that is larger than those of the next five biggest social gaming companies combined. It competes primarily with Electronic Arts (EA); Playdom, which was recently acquired by Disney (DIS); and other independent social gaming studios.

We currently have a $14.20 Trefis price estimate for Zynga, or nearly 130% above the current price, which recently hit a new low following its secondary offering and Facebook's (FB) plummet post-IPO.

Here's why we think Zynga is much more valuable than what the market thinks:

Mobile gaming

Zynga has traditionally generated a major portion of its revenue through social games on Facebook, either through advertising or virtual transactions. In the last couple of quarters, it has been focusing on the rapidly growing mobile gaming space, and we expect its bets on mobile to pay off going forward.

It has already launched multiple games on major smartphone platforms and recently acquired OMGPOP, the maker of the smash hit Draw Something, to bolster its mobile gaming efforts. We expect it to continue churning out new mobile games connected with a common social layer.

Its large user base gives it the kind of scale no other game developer has. It is also in a position to leverage its existing user base to cross-market its new games and quickly gain enough momentum to reach the top of the app/game leaderboards of the respective app stores.

We expect the mobile gaming frenzy, which is expected to be amplified by the rising global smartphone penetration, to drive Zynga user growth going forward as Zynga continues to launch new games to attract additional users. You can check out the impact of new user additions on its value using this chart:

Zynga Average Monthly Active Users for New & Other Games

Online gambling

Zynga has announced its intentions to enter the online gambling space and launch real-money gambling games in the coming years in order to cash in on the very lucrative online gambling space, which may be opened up in the coming months.

Zynga is apparently in talks with Wynn Resorts (WYNN) and is expected to make a move soon. Since the average player spending in online games is much higher than in social games, this could significantly boost Zynga's revenue in the coming years, if Zynga plays its cards right.

Zynga is currently best positioned to enter the online-social gambling space, as its Texas HoldEm Poker is the most popular game in the casino genre. It has also launched a couple more casino themed games like Bingo and Slingo, and is on track to launch some other popular casino titles. It already has the technology and the infrastructure, and it could launch real-money versions of these games quickly once it is done with the paperwork.

You can check out the impact of any increase in its average revenue per user in casino themed games due to its foray into online gambling using this chart:

Zynga Texas Holdem Poker ARPU

Zynga platform

Earlier this year, Zynga launched its own gaming platform and cloud infrastructure -- the Zynga Platform -- in a bid to reduce its dependence on Facebook and to generate additional revenue by hosting and marketing games by other developers. It has already started marketing games by other studios, and could become the default cloud gaming platform, thanks to the scalability and immense marketing reach it offers, and become a potential goldmine for Zynga.

These are the three potential growth drivers for Zynga going forward. Besides these, there is Zynga's current cash cow -- social games -- which is expected to continue to keep generating increasing amounts of revenue going forward.

This is why we believe that Zynga's best years lie ahead, and there's still tremendous upside potential to the stock.

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