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

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

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!