When games meet reality: is Zynga overvalued?
AbstractOn December 16th, 2011, Zynga, the well-known social game developing company went public. This event followed other recent IPOs in the world of social networking companies, such as Groupon or Linkedin among others. With a valuation close to 7 billion USD at the time when it went public, Zynga became one of the biggest web IPOs since Google. This recent enthusiasm for social networking companies raises the question whether they are overvalued. Indeed, during the few months since its IPO, Zynga showed significant variability, its market capitalization going from 5.6 to 10.2 billion USD, hinting at a possible irrational behavior from the market. To bring substance to the debate, we propose a two-tiered approach to compute the intrinsic value of Zynga. First, we introduce a new model to forecast its user base, based on the individual dynamics of its major games. Next, we model the revenues per user using a logistic function, a standard model for growth in competition. This allows us to bracket the valuation of Zynga using three different scenarios: 3.4, 4.0 and 4.8 billion USD in the base case, high growth and extreme growth scenario respectively. This suggests that Zynga has been overpriced ever since its IPO. Finally, we propose an investment strategy (dated April 19th, 2012 on the arXive), which is based on our diagnostic of a bubble for Zynga and how this herding / bubbly sentiment can be expected to play together with two important coming events (the quarterly financial result announcement around April 26th, 2012 followed by the end of a first lock-up period around April 30th, 2012). On the long term, our analysis indicates that Zynga's price should decrease significantly. The paper ends with a post-mortem analysis added on May 24th, 2012, just before going to press, showing that we have successfully predicted the downward trend of Zynga. Since April 27th, 2012, Zynga dropped 25%.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1204.0350.
Date of creation: Apr 2012
Date of revision: May 2012
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.