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Zynga - S1 Thoughts


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Just finished reading the Zynga S1 here are my thoughts:

 

At first glance, Zynga looks more like a business than LinkedIn, but then they start with all this Adjusted EBITDA nonsense. I really believe that when it comes to valuing a business, there is nothing new under the sun. But that doesn't stop these new tech co's trying to re-educate the investing public with these adjusted metrics to make their financials look that much better.

 

The crux of the Zynga business model are these virtual goods. Under US GAAP you can only book these virtual goods as revenue when they are used. This makes sense, as when I fund my Zynga account I may only use the virtual good next month or next year, or I may even decide to "cash out" and not buy anything. There may be a proper formula to better understanding how to project what percentage of the virtual goods will be cashed or used and when, but Zynga did not offer that in their S1.

 

If we strip apart Zynga's belief that every 1$ coming in as "deferred revenue" will eventuall be cold hard profit, the business is unimpressive:

 

http://sec.gov/Archives/edgar/data/1439404/000119312511180285/ds1.htm (Page 42)

 

For 2010, The great Zynga generated $597mm in revenue and US GAAP Net Income of $90MM. For the first quarter of 2011, those numbers are $235mm and $11mm respectively.

 

The current valuation under Sharepost is $15.5B but rumors on pricing in the range of $20-25B. Under US GAAP, this indicates an EV Multiple (Zynga has raised $1B in cash and will have another $1B more from the IPO) of 100x Net Income on the lowside, and as high as 300x Net Income on the high side.

 

Now under this scenario, I may be a little aggressive because a portion of those deferred revenues will in fact translate into profits. That being said, I don't agree with the Zynga methodology of adding back ALL The deferred revenue to come up with an Adjusted EBITDA as there is clearly a cost for every dollar in the system. The best way to figure out just how much cash ends up in Zynga's pockets is to look at the Cash flow Statement. FCF never lies.

 

The Cash flow statement provides a lot more insight into the potential earnings power of this business. Its definitely interesting.

 

For 2010, I would estimate the true FCF to be roughly $150mm-200mm when adding back what appear to be truly one-time items. However there is not enough clarity to truly understand what will be recurring and what will in fact be one time expenses.

 

If you listen to Zynga and buy their argument for "Bookings" + Adjusted Ebitda, you are still going to be paying up a high valuation for this business. Lets assume that their EBITDA was in fact $392mm, that still indicates an EV/EBITDA multiple of between 40-50x on day 1.

 

Google is currently trading at an EV/EBITDA multiple of 12.

 

My gut feeling is that Zynga most probably has a fair FCF of $150-200mm per year which makes for a great business but not one worth $15-20B. I think the insiders know that as well.

 

Since inception Zynga has raised $833mm from investors and has spent $265mm repurchasing common stock from employees and CEO Marc Pincus.

 

 

From our inception in October 2007 to date, Mr. Pincus, our Chief Executive Officer, Chief Product Officer and the Chairman of our Board of Directors, has purchased an aggregate of 149,197,328 shares of our common stock. To date, Mr. Pincus has sold an aggregate of 43,629,310 shares of our common stock at prices ranging from $0.42 to $13.96. In addition to sales by Mr. Pincus, our other current and former executive officers and employees have sold an aggregate of 51,192,501 shares of our capital stock at prices ranging from $0.25 to $17.09 per share, including, 6,717,161 shares we repurchased from our other executive officers and employees. These sales include two tender offers in 2010 by third parties in which 383 employees were eligible to participate and 298 employees decided to participate and sell shares.

 

These businesses never grow forever, we saw it with Open table recently. At some point the Zynga growth will slow and only then will we really see if this is an EFAX type online business that spins out cash every quarter consistently, or benefitted from some temporary social craze. One thing is for sure, investors buying in at the IPO price are not getting a bargain.

 

I would take Google @ 12x EV/EBITDA over Zynga @ 40-50x any day.

 

Cheers!

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  • 1 year later...

Just finished reading the Zynga S1 here are my thoughts:

 

At first glance, Zynga looks more like a business than LinkedIn, but then they start with all this Adjusted EBITDA nonsense. I really believe that when it comes to valuing a business, there is nothing new under the sun. But that doesn't stop these new tech co's trying to re-educate the investing public with these adjusted metrics to make their financials look that much better.

 

The crux of the Zynga business model are these virtual goods. Under US GAAP you can only book these virtual goods as revenue when they are used. This makes sense, as when I fund my Zynga account I may only use the virtual good next month or next year, or I may even decide to "cash out" and not buy anything. There may be a proper formula to better understanding how to project what percentage of the virtual goods will be cashed or used and when, but Zynga did not offer that in their S1.

 

If we strip apart Zynga's belief that every 1$ coming in as "deferred revenue" will eventuall be cold hard profit, the business is unimpressive:

 

http://sec.gov/Archives/edgar/data/1439404/000119312511180285/ds1.htm (Page 42)

 

For 2010, The great Zynga generated $597mm in revenue and US GAAP Net Income of $90MM. For the first quarter of 2011, those numbers are $235mm and $11mm respectively.

 

The current valuation under Sharepost is $15.5B but rumors on pricing in the range of $20-25B. Under US GAAP, this indicates an EV Multiple (Zynga has raised $1B in cash and will have another $1B more from the IPO) of 100x Net Income on the lowside, and as high as 300x Net Income on the high side.

 

Now under this scenario, I may be a little aggressive because a portion of those deferred revenues will in fact translate into profits. That being said, I don't agree with the Zynga methodology of adding back ALL The deferred revenue to come up with an Adjusted EBITDA as there is clearly a cost for every dollar in the system. The best way to figure out just how much cash ends up in Zynga's pockets is to look at the Cash flow Statement. FCF never lies.

 

The Cash flow statement provides a lot more insight into the potential earnings power of this business. Its definitely interesting.

 

For 2010, I would estimate the true FCF to be roughly $150mm-200mm when adding back what appear to be truly one-time items. However there is not enough clarity to truly understand what will be recurring and what will in fact be one time expenses.

 

If you listen to Zynga and buy their argument for "Bookings" + Adjusted Ebitda, you are still going to be paying up a high valuation for this business. Lets assume that their EBITDA was in fact $392mm, that still indicates an EV/EBITDA multiple of between 40-50x on day 1.

 

Google is currently trading at an EV/EBITDA multiple of 12.

 

My gut feeling is that Zynga most probably has a fair FCF of $150-200mm per year which makes for a great business but not one worth $15-20B. I think the insiders know that as well.

 

Since inception Zynga has raised $833mm from investors and has spent $265mm repurchasing common stock from employees and CEO Marc Pincus.

 

 

From our inception in October 2007 to date, Mr. Pincus, our Chief Executive Officer, Chief Product Officer and the Chairman of our Board of Directors, has purchased an aggregate of 149,197,328 shares of our common stock. To date, Mr. Pincus has sold an aggregate of 43,629,310 shares of our common stock at prices ranging from $0.42 to $13.96. In addition to sales by Mr. Pincus, our other current and former executive officers and employees have sold an aggregate of 51,192,501 shares of our capital stock at prices ranging from $0.25 to $17.09 per share, including, 6,717,161 shares we repurchased from our other executive officers and employees. These sales include two tender offers in 2010 by third parties in which 383 employees were eligible to participate and 298 employees decided to participate and sell shares.

 

These businesses never grow forever, we saw it with Open table recently. At some point the Zynga growth will slow and only then will we really see if this is an EFAX type online business that spins out cash every quarter consistently, or benefitted from some temporary social craze. One thing is for sure, investors buying in at the IPO price are not getting a bargain.

 

I would take Google @ 12x EV/EBITDA over Zynga @ 40-50x any day.

 

Cheers!

 

This was my second post ever on the CoBF Board. For those wondering, we were short and partially covered our position after hours for a gain of over 70%. I expect BV a company we are short in a very big way to follow...

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Good call Moore capital. 

 

Looks like the company has a net cash position of $1.5 billion and a market cap of $2.3 billion.  So the market is valuing Zynga's operating business at $800 million. 

 

http://investor.zynga.com/releasedetail.cfm?ReleaseID=695419

 

"Net loss for the second quarter of 2012 included $95.5 million of stock-based expense compared to $33.1 million of stock-based expense included in the second quarter of 2011."

 

"Stock-based expense is projected to be in the range of $410 million to $430 million."

 

"Free cash flow was ($204.4) million for the second quarter of 2012 as reported or $29.3 million excluding the purchase of the company's headquarters, compared to ($0.4) million for the second quarter of 2011."

 

"Capital expenditures are projected to be in the range of $370 million to $380 million, which includes the purchase of our corporate headquarters building in April 2012. "

 

"Non-GAAP weighted-average diluted shares outstanding are projected to be approximately 845 million shares in the fourth quarter of 2012"

 

-up from 736 million currently

 

"Adjusted EBITDA is projected to be in the range of $180 million to $250 million."

 

-Still trading at 12.8-9.2X Adjusted EBITDA

 

What a disaster company

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90% of their business is tied to Facebook. This quarter showed how Facebook making small changes can have a huge effect on their business. Gaming is an incredibly tough industry, as online games have a very short lifespan.

 

Some suspicious insider sales this quarter as well.

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Good call Moorecapital.  The overvaluation, the low barrier to enter the industry and their reliance on facebook made this company a pos.  I also didn't care for the CEO's ability to steal shares back from employees and the amount of insider selling that went on early.

 

Personally I think Linkedin has a legit business with recruiters.  Its a pretty useful resource.  I know nothing of the valuation though.

 

 

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Good call Moore capital. 

 

Looks like the company has a net cash position of $1.5 billion and a market cap of $2.3 billion.  So the market is valuing Zynga's operating business at $800 million. 

 

http://investor.zynga.com/releasedetail.cfm?ReleaseID=695419

 

"Net loss for the second quarter of 2012 included $95.5 million of stock-based expense compared to $33.1 million of stock-based expense included in the second quarter of 2011."

 

"Stock-based expense is projected to be in the range of $410 million to $430 million."

 

"Free cash flow was ($204.4) million for the second quarter of 2012 as reported or $29.3 million excluding the purchase of the company's headquarters, compared to ($0.4) million for the second quarter of 2011."

 

"Capital expenditures are projected to be in the range of $370 million to $380 million, which includes the purchase of our corporate headquarters building in April 2012. "

 

"Non-GAAP weighted-average diluted shares outstanding are projected to be approximately 845 million shares in the fourth quarter of 2012"

 

-up from 736 million currently

 

"Adjusted EBITDA is projected to be in the range of $180 million to $250 million."

 

-Still trading at 12.8-9.2X Adjusted EBITDA

 

What a disaster company

 

BV = Bazaar Voice...

 

Joshua, I get chills down my spine when I think how Mark Pincus sold 46mm shares of ZNGA pre IPO to Pension Funds and Institutions @ between $.46-$13.00 (No disclosure as to what the VWAP was which is also ridiculous) in addition he also sold $106mm worth of shares back to the company in a PRE IPO Tender... THEN on top of those two pre-exit exits, he sold 16.5mm shares for $11.65 in March 28th.

 

Why isn't Mark Pincus being sued? He has extracted at a minimum $300mm and probably closer to $600-700mm in cash from this company while issuing strong guidance etc. I urge some of you to listen to Rich Greenfield tear him a new one on the conference call last night.

 

These web 2.0 Silicon Valley guys, they think theyre so smart, but I have yet to see anything more than a dog and pony show from: OPEN, Z, ZNGA, TSLA, FB, LNKD, YELP, etc... It's all smoke and mirrors, there is not a business there worth anywhere near the current multiples awarded by Mr. Market.

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These web 2.0 Silicon Valley guys, they think theyre so smart, but I have yet to see anything more than a dog and pony show from: OPEN, Z, ZNGA, TSLA, FB, LNKD, YELP, etc... It's all smoke and mirrors, there is not a business there worth anywhere near the current multiples awarded by Mr. Market.

 

Tesla might be overvalued, but I wouldn't put it in the same category as the others.

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  • 2 months later...

If you're looking for another one, have a look at SPLK.

 

http://www.marketfolly.com/2012/10/zack-buckley-shorts-splunk-value.html

 

We are short SPLK :) Enjoyed the presentation at the VIC (just returned from NYC actually)

 

I hope to see some justice served on Marc Pincus when the class actions finally reach the courts. A guy like Pincus should be lucky to even own $100 million worth of anything given his performance (that is the value of his remaining ZNGA stake) yet he is sitting on an additional $400-500 million+ in cash from sales that were obviously undeserved. He sold shares on the private market, he sold shares in a tender offer back to the company, and he sold shares in a secondary only a few months ago.

 

 

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Zynga is not only a fad, but it is also horribly managed. There are certain companies, such as Google, that can afford to pay their employees very high salaries and give huge perks and benefits because that cost is so insignficant to their business. And Google's R&D actually needs the best and brightest PhD types as they are doing stuff like self-driving cars (I don't think that is a good investment for Google, but that's a different story). I don't think there is any collection of artifical intelligence and machine learning talent as good as Google's and that is their advantage going into the future.

 

Making games do not need the genius PhD types with 1-in-a-million type of intelligence. Zynga does not need to spend $200+ million buying some really fancy headquarters to retain talent. Cash becomes a generic "asset" and this asset just sits there doing nothing. People who work for Zynga get to enjoy it, but the shareholders get shafted. It is just Pincus's dream to run an empire and Zynga is this big elaborate pyramid that he built. I think even if Zynga comes up with another big hit and they make a lot of money, Pincus will spend it all.

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Guest rimm_never_sleeps

zynga was a masterful con job from the top down in unison with SV Vc's and Khaki wearing wall street investment bankers.

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  • 7 months later...

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