Zynga Valued Higher Than Electronic Arts as IPO Expectations Rise

As impatient as investors for an IPO from Mark Zuckerberg’s monolithic Facebook are, they are just as anxious to invest in the video game studio that has become synonymous with the social network. Zynga Game Network Inc., the San Francisco based game studio behind the social gaming phenomenon FarmVille , is, to put it lightly, an attractive business right now. Since the studio opened in 2007, when they received millions in start up investment from Kleiner Perkins Caufield & Byers’ iFund, Zynga has expanded from a tiny start up with a handful of employees to a multinational force with a staff of 1300. They have acquired and opened studios in Germany, India, Ireland, China and Japan in addition to their U.S. studios in Texas, California, Maryland and Massachusetts. FarmVille currently hosts more than 62 million players. SharesPost Inc., a group that handles the sales of privately owned equity, announced yesterday that Zynga stock is now valued at $5.51 billion, surpassing Electronic Arts (NASDAQ: ERTS ), the one-time most valuable game publisher on the planet whose stock is now valued at $5.16 billion. With a large percentage of EA’s business devoted to physical retail products, their operating costs alone far exceed Zynga’s, though the two have comparable audience reach. That fact coupled with the downturn in game retail and the rise in profits from in-game transactions on social network and mobile platforms make SharesPost’s valuation of Zynga less outlandish than it would have been just two years ago. Discussing the announcement with Bloomberg , ThinkEquity LLC analyst Atul Bagga estimated that the market for virtual goods, the primary revenue stream in Zynga games like FarmVille , will be worth $3.6 billion on by 2013 and the increased importance of that market in the overall video game space could certainly lead to Zynga’s value and influence surpassing major publishers whose primary business is retail. Despite the feasibility of their valuation, SharesPost’s claim that Zynga is a more valuable (theoretical) stock than Electronic Arts is still based on a market that may or may not grow into a sustainable business over the next few years. Zynga is enjoying a dominant position in the social and mobile game space but that market is still in a state of flux. Until there is greater stability in platform access to Zynga’s products, it’s impossible to predict what their value will be by the time the company finally offers an IPO. Will FarmVille and its attendant spin-offs like FrontierVille maintain their audience or will they continue to shrink? After all, FarmVille shed almost 18 million users between March and September? Will Facebook, Zynga’s core outlet, be replaced by another social network? Will Zynga’s products gain a foothold in the mobile app market that is sustainable? These are volatile unknowns. Electronic Arts, on the other hand, has a history of adapting to new markets and is already established in all the sectors Zynga has grown in. Though shares of ERTS are trading at $15.60 today, down nearly -24% from their 52-week high of $20.24, the company will likely rebound in the post holiday quarter. A more likely scenario than Zynga having greater value EA following an IPO: ERTS acquiring Zynga in the next 12 months. As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
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