Online game company Zynga has filed for an initial public offering hoping to raise up to US$1 billion, the latest hot Internet startup to tap investor interest in Internet social media companies.
The company, which makes popular games that people play on the Facebook social network, did not say how many shares it was planning to sell or give an expected price range, according to a U.S. government filing on Friday.
A source previously told Reuters that Zynga's IPO could raise US$1.5 billion to US$2 billion and could value the company at US$15 billion to US$20 billion.
"I think it's going to be an exciting IPO," said Sterne Agee analyst Arvind Bhatia. "It's unique. It's one of a kind. The growth is amazing."
Zynga is the company behind FarmVille and Mafia Wars. It is the top game publisher on Facebook. While its games are free, its revenue comes mainly from selling virtual items such as tractors and weapons that people use in the games.
In the three months ended March 31, Zynga's common stockholders broke even on revenue of US$235.4 million compared to US$101 million for the same quarter in 2010. During the same period, Zynga reported adjusted earnings before interest, taxes, depreciation and amortisation of US$112.3 million, up 20 percent from the same quarter a year earlier.
"At 232 million monthly actively users and (revenue of) US$235 million, that is US$1 per monthly active user per quarter, which is impressive," said Wedbush Securities analyst Michael Pachter.
Zynga offers an alternative to investors beyond traditional videogame companies, which have seen their share prices erode in recent years. Zynga's games, which do not require hardware and are played mainly on Facebook, have been eating into the US$60.4 billion global video game industry, which consists largely of action or sports games played on consoles and TV sets.
Consider gaming stalwarts Electronic Arts and Activision Blizzard Sterne Agee analyst Bhatia estimates that EA is trading 11 times its enterprise value to EBITDA during the last four quarters, while Activision is trading at 6 times. Zynga is trading at 34 times an estimated US$15 billion valuation.
And yet, Zynga could fall prey to the same factors besetting traditional video game publishers, including pressure to churn out hits to prevent fickle players from moving on to the next trendy game.
Zynga has expanded rapidly through small acquisitions at the rate of about one a month in the last year.
THE FACEBOOK EFFECT
Zynga's dependence on Facebook is seen as a benefit --investors are piling into social media companies such as LinkedIn and Groupon -- and a risk.
The company warned that it generates nearly all of its revenue and players through the world's No. 1 social networking site. "Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock," according to the filing.
Last year, for example, the gaming company came close to declaring war over a change in Facebook's policy involving credits. Facebook wanted to take a 30 percent cut in transactions involving its credits -- the currency Zynga players use to buy virtual goods.
Bing Gordon, a video game veteran, Zynga board member and partner at Kleiner Perkins Caufield & Buyers, described the standoff during the TechCrunch Disrupt conference in May as a Silicon Valley version of the Cuban Missile crisis where Zynga was at one point prepared to walk away from Facebook.
"Facebook would love to lessen its dependence on Zynga, but it's not going to shoot Zynga," said Wedbush's Pachter. "Zynga is reason to come back to Facebook every day."
The amount of money a company says it plans to raise in its first IPO filings is used to calculate registration fees. The final size of the IPO could be different.
Underwriters are being led by Morgan Stanley and Goldman Sachs.
(Reporting by Clare Baldwin, Jennifer Saba and Liana B. Baker; Editing by Lisa Von Ahn, Gunna Dickson and Robert MacMillan).