Zynga IPO values company at $7 billion

@CNNMoneyTech December 16, 2011: 8:06 AM ET
zynga ipo price

Zynga priced its IPO at the top of its target range, valuing the -Ville game maker at $7 billion.

NEW YORK (CNNMoney) -- Turns out there's billions to be made from FarmVille cows and crops. Zynga priced its initial public offering at $10 a share late Thursday, a mark that values the gamemaker at about $7 billion.

Zynga is set to begin trading on the Nasdaq on Friday under the ticker "ZNGA."

In a filing earlier this month, Zynga said it planned to sell directly 100 million shares in its IPO to raise up to $1 billion. That edges out Groupon and makes Zynga's the largest U.S. Internet IPO since Google's (GOOG, Fortune 500) 2004 debut.

Zynga's $7 billion valuation is impressive, but $10 a share is significantly below the $17.20 per share valuation the company used for a recent round of stock grants. As of August 2011, Zynga's outside consultants estimated the company's worth at $14 billion.

Zynga is entering the market at a turbulent time for this year's batch of tech IPOs. Shares of Groupon (GRPN), Pandora (P), Zillow (Z), LinkedIn (LNKD) and Angie's List (ANGI) all suffered steep double-digit losses for November, though most have clawed back a bit in December.

But Zynga's financials are stronger than many of its newly public counterparts, and the company has multiple revenue streams.

In 2010, the company had a $90.6 million profit on sales of $597 million. For the first nine months of 2011, it netted $30.7 million in profit on almost $829 million in sales.

Zynga gets revenue from its users paying real money for virtual goods, like tractors and animals for their online farms. Zynga noted in its filing that it relies on this "small portion of our total players for nearly all of our revenue," but it didn't break that figure out separately. The company did reveal that users create and store more than 30,000 virtual goods every second.

Zynga's other revenue stream is unique advertising, such as Starbucks (SBUX, Fortune 500) paying to have a virtual coffee shop in CityVille. Users might have to visit that virtual store 10 times in order to build a Starbucks franchise in their own virtual cities.

But the casual gaming space is heating up, and Zynga faces competition from big names including Electronic Arts (ERTS) and Disney-owned (DIS, Fortune 500) Playdom. It's feeling the crunch: Zynga's number of daily active users declined 10%, to 54 million, in the five months since the company first filed its IPO paperwork.

The Facebook effect: In its IPO filings Zynga called Facebook its "primary distribution, marketing, promotion and payment platform," noting that any change in terms could harm business.

Zynga learned that the hard way. In its early days, the company resorted to spammy and scammy tactics to gain new -Ville gamers and monetize existing ones.

Facebook users became so frustrated with Zynga notifications clogging up members' newsfeeds and dashboards that Facebook decided to expressly prohibit the practice in early 2010.

Zynga straightened up after the crackdown, and it has a contract with Facebook in place through 2015 governing its service terms. The deal requires Zynga to use Facebook's own currency, Facebook Credits, as its primary payment system. Facebook keeps 30% of the revenue from those payments, and passes the remaining 70% on to Zynga. To top of page

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