Why Zynga Inc (ZNGA) is Overvalued with or without Online Poker

Page 1 of 2

Let’s be frank: Zynga Inc (NASDAQ:ZNGA)‘s current batch of online gaming properties doesn’t justify the company’s current market cap. Zynga’s gaming franchises are fun and even addicting (who hasn’t played too much Words With Friends?) but from an investment standpoint they simply aren’t compelling.

So that leaves us with the enterprise as it exists plus the Zynga Inc (NASDAQ:ZNGA) Poker option. The company has net-net working capital of $750 million, implying that the actual value of the continuing operations and poker potential is worth $2 billion.

Zynga Inc (NASDAQ:ZNGA)Does Zynga have a $2 billion opportunity in poker?

The company’s big Zynga Poker franchise is the largest free-to-play poker game in the world with 38 million active users, but the app itself isn’t a blockbuster, seeing as players use fake money to place their wagers.

Ascribing value to Zynga Poker isn’t easy. It’s best comparable is the old PokerStars, which did $1.4 billion in revenue and $500 million in net profit from 20 million players, or $25 in net profit per year per player. Zynga Poker has nearly twice as many members (38 million) as PokerStars, but not every free Zynga player will turn into a real money player.

I’m not one to shy away from back of the envelope math to determine a company’s intrinsic value. I assume that PokerStars included ongoing marketing in sales, general and admin expenses, which reduced its net margin. Zynga Poker, having already established itself, should have much smaller SG&A expenses, so its profits per user will likely look much like PokerStars’ revenues per user of $70.

Here’s how I look at it

A 1% conversion rate from fake money to real money at the same per-user revenue as Poker Stars would generate $26.6 million in annual revenue. Thus, a 5% conversion rate would generate $133 million in annual revenue to Zynga, while a 10% conversion would result in $266 million in revenue to the company.

These figures are hardly worth getting excited about. Assuming even an extreme best case scenario where net margin is 100% from online poker revenue, Zynga looks tremendously overvalued. The “best case” is that Zynga Poker launches today, and generates $266 million in perpetuity, which, when discounted at a 10% discount rate, is only worth $2.6 billion, implying that Zynga is only modestly undervalued with extremely rosy assumptions.

Being only slightly more realistic about the launch time – not the profitability of each user – and assuming that Zynga Poker is still 5 years away from coming online in any meaningful form, poker as an option is worth only $1.6 billion when the cash flows are discounted for another 5 years of waiting time at the same 10% discount rate.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Click here to Read Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 74 percentage points in 2.5 years. Our beta is only 1.2 (download a FREE newsletter and see the details inside)

Lists

Best Selling Magazines in the World

Shortest People in History

The Most Celebrated Holidays in the World

Most Expensive Handbag Brands in the World

Top Selling Comic Book Issues of this Century

The Most Powerful Women in Politics

Best Paid DJs

Most Rebellious Female Artists

Best Paid TV Actresses of 2014

Best Paid Actors of 2014

Most Expensive Horses in the World

Tallest People Ever

Most Encouraging Feminist Celebrities

Best Paid Supermodels of 2014

Top 10 Suburbs for Retirement in 2015

10 Wealthiest Cities in America

Top 10 TED Talks for Entrepreneurs

Best TED Talks on Education

25 Most Dangerous Places to Live in America

Top 10 Ski Resorts in the United States – 2014 List

Top 10 Most Remote Places in the World

Most Visited Museums in the United States

Wealthiest Photographers in the World

Most Famous Gay Athletes

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!