Analysis: Putting Zynga's IPO In Perspective

If we've learned one thing from today's long-awaited Zynga IPO filing, it's this: Damn, would it be nice to be Mark Pincus. The founder and CEO of the social games juggernaut stands to make an insane amount of money when trading of the company begins on Wall St. (likely 3-4 months from now). He's already bucks up from selling 7.8 million shares back to the company in March for $100 million – and he's still holding another 105 million shares in his portfolio. It's nothing short of a massive payoff for his four-year old company. (Fun factoid sidebar: Pincus not only owns the company, but he's the landlord for their office, pocketing $28,000 per month in rent. Also, Zynga has given him $145,000 over the past two years to use his private plane.) As investors lick their chops, though, the rest of the video game industry is busy reading tealeaves. If, as expected, the company increases its offering to $1.5 billion or $2 billion, that will catapult it to the top of the publishing pack, with a valuation of $15 billion-$20 billion – supplanting Activision-Blizzard as the king of the hill and shoving Electronic Arts a little further down. But if that happens, Zynga's 'industry leader' status is going to come with an asterisk – and it has nothing to do with the types of games the company makes. It's gonna get a little wonky here with the moneyspeak, so bear with me. To determine a comparative value between Zynga and traditional game companies, there's a multiple known as EV/EBITDA – essentially a company's enterprise value divided by its EDITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Financial nerds use it to look for attractive takeover candidates and to search for signs of a bubble. At its core, if the multiple is low, there's a decent chance the company is undervalued. Depending on the industry, higher multiples can point to something that's overvalued – with the exception of companies in high-growth industries. Gaming, in and of itself, isn't high growth (just look at the NPD numbers), but social gaming is. So what I'm about to show isn't an exact apples to apples comparison, but it's as close as you're going to find for a while. Arvind Bhatia, an analyst with Sterne Agee, ran the numbers to let investors compare how the Zynga offering may compare to traditional game companies. Here's what he found: Activision has a 6X multiple. Electronic Arts came in at 11X. Take-Two and Ubisoft both had 8X multiples. Zynga, if it sticks with the $1 billion round, will have a $10 billion valuation, giving it a multiple of 19X – a pretty high figure, but nothing insane. If it bumps that to $2 billion, however (as many expect it to do), the valuation jumps to $20 billion and the multiple soars to 46X. Decide for yourself if that constitutes a bubble. I'll be busy covering my ears. Actually, Zynga's filing could benefit a traditional game publisher – EA. EA's one of the few companies that has invested substantially in social network games, with its Playfish acquisition in late 2009. The company saw its shares spike earlier this week when talk of Zynga's imminent filing began to circulate – and they're up 2.5 percent today. Disney, of course, is laser focused on social games these days, but because that company is divested in so many industries, this likely won't ping their stock. Does a public Zynga mean the company's a bigger threat to traditional game publishers? Not really. It'll have more money to woo developers over, which is the biggest concern. But analysts say when it comes to stealing customers, a lot of the worries have been overblown. "We do not see Zynga’s business as cannibalizing the packaged goods business, at least for hard core games," says Michael Pachter of Wedbush Securities. "We think that Zynga has captured some of the Guitar Hero and Wii Fit crowd—primarily women—and expect the company to continue to grow the games category beyond the traditional 13 – 30 year-old male demographic. However, we do not think that Zynga’s success spells doom or failure for the traditional publishers, as we are confident that the hard core gamer is here to stay."