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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!