Zynga’s Looming IPO- the MBA Gamer’s Perspective

Zynga to file for IPO?

EDITOR’S NOTE: This is the first of what I hope will be many guest posts from my friend and compatriot, Brian DeWolf. Welcome Brian!

LinkedIn, Pandora, Groupon, Skype, Kayak, and now Zynga. All these companies have filed for IPOs and many have already had theirs. Earlier this year we saw LinkedIn shoot up over $100 after its IPO at $45 within the first day, and eventually it settled in at over $80. Groupon filed and it is currently in a structure of something similar to a pyramid scheme; using its revenue from the next partner’s up front investment to pay off the previous one.

As early as tomorrow, social media gaming giant Zynga will throw its hat into the mix. Reports are saying that they will attempt to raise $1.5 to $2 Billion from the IPO. This move could take the company to a valuation of $20 Billion. Assuming it does reach this point, Zynga would be the 175th largest company on Wall Street. Morgan Stanley and Goldman Sachs are reportedly helping the fund.

I am a little torn on this; there a couple of competing opinions within myself: one being the gamer, most relatable to a little kid who is essentially still a teenager who laughs at ridiculously stupid fart and antomy jokes; the other being the savvy business-minded MBA who has recently broken into becoming an “adult”. The gamers perspective says this is a wonderful opportunity for a gaming company. There has been a lot of crackdown on the gaming industry over the last decade and it has gone through a couple of recessions. While Zynga is a social game company, and I consider myself somewhat of a core gamer involved in FPS, MMO, RTS, and many more genres, this does pose something of a significant boost to the industry as a whole.  If Zynga can get off the ground and become a successfully publicly traded company, following the likes of, say, Activision Blizzard, then the future for all other small start up game companies is very bright. This could show the industry that the current model for success is not the only model, and there are other ways to produce, monetize, and develop games and that there are other people besides the core gamers out there.

For the business minded me, there are some red flags going up. Here is a company that is worth approximately $9 Billion, on a good day, and after this one move they could be valued at $20 Billion, that’s billion with a “B”. LinkedIn just posted its first year of profits and immediately when it went public their valuation shot through the roof, and Groupon has never posted positive returns. This is beginning to look like something that is way too top heavy to support itself.

It is always a difficult proposition to evaluate something that has no real tangible good. If you have a steel manufacturer, you can see their books and what everything is worth, if there is a computer company again everything is laid out for you, but what happens when you are trying to value something that has no real presence beside a code written in 1s and 0s? Can you honestly say that those numbers, that “on” or “off”, can really be worth that much money?

I just don’t buy into that thinking. One can fall into the group think mentality way too quickly when a company like this goes public. You think, “Well if this titan in the finance industry is saying they are worth this much, then they must be, BUY!” I guess I just don’t take things at that face value. While this company might take this funding and grow exponentially and invest it well into itself, the safer, more likely bet is that it might be a bit shakier than that.Lets hope they do this right and this is the shock the game industry needs to get out of the music industry mentality of publishers taking all the money. Produce and distribute your own games, it works too! Outlook: Cautious. I would recommend investing until the price doubles then get the eff out.