Economy – Quantitative Finance – General Finance
Scientific paper
2012-04-02
Economy
Quantitative Finance
General Finance
Scientific paper
On December 16th, 2011, Zynga, the well-known social game developing company went public. This event followed other recent IPOs in the world of social networking companies, such as Groupon or Linkedin among others. With a valuation close to 7 billion USD at the time when it went public, Zynga became one of the biggest web IPOs since Google. This recent enthusiasm for social networking companies raises the question whether they are overvalued. Indeed, during the few months since its IPO, Zynga showed significant variability, its market capitalization going from 5.6 to 10.2 billion USD, hinting at a possible irrational behavior from the market. To bring substance to the debate, we propose a two-tiered approach to compute the intrinsic value of Zynga. First, we introduce a new model to forecast its user base, based on the individual dynamics of its major games. Next, we model the revenues per user using a logistic function, a standard model for growth in competition. This allows us to bracket the valuation of Zynga using three different scenarios: 3.4, 4.0 and 4.8 billion USD in the base case, high growth and extreme growth scenario respectively. This suggests that Zynga has been overpriced ever since its IPO. Finally, we propose an investment strategy, which is based on our diagnostic of a bubble for Zynga and how this herding / bubbly sentiment can be expected to play together with two important coming events (the quarterly financial result announcement around April 26th, 2012 followed by the end of a first lock-up period around April 30th, 2012). On the long term, our analysis indicates that Zynga's price should decrease significantly.
Cauwels Peter
Forró Zalán
Sornette Didier
No associations
LandOfFree
When games meet reality: is Zynga overvalued does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with When games meet reality: is Zynga overvalued, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and When games meet reality: is Zynga overvalued will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-509416