Zynga Stock Analysis

The IPO AnalysisDecember 2011

© Investors’ Mosaic, Inc.www.investorsmosaic.com


1) The Thesis

2) Risks That Need to Be Monitored

3) Should You Participate in the IPO?

4) The Business Model: Unique and Potentially Very Powerfuli. How Zynga Makes Money

ii. Zynga-at-a-Glance

iii. Overview of Key Metrics

5) Analysis of Key Metrics and Financials

6) Financialsi. Income statement, balance sheet, cash flow

7) Valuation1) Base case, Bull case, and Bear Case

2) Comparable Valuations

8) Questions We Would Be Asking Management

9) Conclusion

10) Appendices

Table of Content

Summary Thesis


Factor Impact Details

Powerful Business Model Favorable Rapid innovation, low-cost deployment, and strong cash flow at maturity

Market Leader in Paradigm Shift of Social Gaming

Favorable Focused on statistical analysis to improve player engagement and monetization

Strong Industry Growth Favorable Social gaming market is large ($7BN) and rapidly growing ($14Bn in 2015)

Dependent on Facebook Negative Zynga relies on FB’s social platform to achieve virility and keep customer acquisition costs low

Valuation Neutral $9.25 is a fair valuation, wait for a better entry point as a few meaningful unknowns exist

Zynga Represents a New Paradigm in Gaming, but Valuation Seems Fair

• Zynga is an online gaming and analytics company, utilizing social interactions and data analysis to make games entertaining & engaging.

• It’s a new business model in gaming, enabling rapid product releases, viral adoption, and low-risk failures; equates to a competitive advantage.

• Social games are for the mass market, focusing on simplicity and ease-of-use to offer a relatively mindless form of entertainment.

• Zynga is obsessed with building repeatable and scalable processes. They have built their own statistical analysis system, which is enables them to make data-driven decisions to improve user monetization.

• They are very dependent on a healthy relationship with Facebook. 93% of revenue came through FB platform, and FB takes a 30% cut of all virtual goods revenue. Also keeps customer acquisition costs low.

• In order to reduce their dependence on Facebook, Zynga is expanding internationally and onto additional platforms (Google + and Mobile).


Zynga Represents a New Paradigm in Gaming, but Valuation Seems Fair

• Zynga also diversifying from FB by building Platform Z. This will be a proprietary platform that utilizes FB’s technology to access friends. Zynga will be able to keeps more $$ from virtual goods.

• The upcoming shift to Platform Z has the potential to be disruptive, especially if it ruffles Facebook's feathers due to lost revenue.

• Huge market opportunity in social gaming:– Video software game market is $49.0BN; social game market is $7.3BN,

expected to grow to $14BN by 2014• Zynga has learned the secret sauce of a success game:

– Has the top selling social game on Facebook every month since 2009– Has 4 / 5 of the top selling games on Facebook based on DAU

• Likely to be very aggressive with acquisitions after failed attempts to purchase PopCap (reportedly $950M) and Rovio (reportedly $2.2BN).

• Founder & CEO, Mark Pincus, will have 36% of the voting power, so shareholders won’t really have a say in corporate matters.


Risks That Must Be Monitored: Part 1• Zynga needs to be successful on mobile platforms to maintain growth

trajectory. Mobile has different gaming mechanics, payment tendencies, payment systems, and channel partners.

• International expansion is also key to growth, but is uncertain due to the need for localized content.

• Increased regulations regarding user data may limit game adoption or targeted advertising.

• The average life for recognizing a durable virtual good is declining.– Declined from 18 months to 15 months in the 9 months ending Sep. 2011 vs. the

same period last year. This is either an indication that games are declining in player engagement or an accounting maneuver to generate revenue in the short-term.

• The nature of social gaming creates user attrition, requiring Zynga to rapidly release updates and new games to maintain growth.

• Zynga has hit upon a winning formula, but that also means that it’s game mechanics are virtually identical across games, which risks user burn-out as they become bored of the “same old stuff”.

© Investors’ Mosaic, Inc. www.investorsmosaic.com

Risks That Must Be Monitored: Part 2

• Zynga’s Platform “Z”, which will reduce their reliance on Facebook, may be a good long-term endeavor, but may cause pain during the transition. Facebook will not want to see Zynga take all the traffic off away, so expect a fight.

• There is a massive pile of shares outstanding, 717 million after the IPO, with another 200 million of dilutive options and restricted stock that will impact the share count over time. Therefore, financial leverage may be less than the market understands.

• Founder and CEO Mark Pincus has cashed out $109M, so he may act overly-aggressive to hit a “homerun”.

• New games may not be not driving meaningful new user growth, potentially indicating stronger than expected cannibalization.

• International users don’t monetize as well; mobile users monetize better-than-average.


The Offering: Should You Participate?


Proposed IPO Valuation Seems Fair, but is a Massive Haircut From the Last Round


•We think the stock is fairly valued at $9.25, or a market cap of $6.6 billion.•We used an average of Price / Sales and

EV / EBITDA to generate our price targets.• If you are bullish on where the market will

price the company, then there may be upside to $11.33, or $8.1 billion.•Conversely, if you are bearish on how the

market will value the company, there is downside to $7.27, or $5.2 billion.

• The valuation “bubble” was confirmed in Q2 and Q3 when traditional mutual funds pretended to play Venture Capitalist and valued Zynga at $14 billion.• FYI, this also occurred with Groupon.•Also, private markets like Second Market

are creating silly valuation from investors with little financial information.

Source: www.retailroadshow.com

Zynga Has a Good “Story to Tell”, Which Investors Will Love


• Aggressive new game launch should bolster user growth, while a growing base of existing games will support bookings growth. This combination should enable decent bookings, revenue, and income growth over the next few quarters.• Investors will love the right-hand slide that lays out multiple growth avenues. However, the addition

of new platforms such as Google will have limited impact since FB is the most broad platform you could ask for. The other columns are legitimate growth opportunities.• International growth will be the lynchpin for valuation, in our opinion. Without it, Zynga will have a

hard time growing into the market’s – and our– expectations.

Source: Zynga Road Show Presentation

The Business Model: Unique & Potentially Very Powerful


The Business Model

REVENUEVirtual Goods

Advertising

COST OF GOODS SOLD

Web hosting and data center costs; payment processing fees

Salaries and benefits for customer support & infrastructure teams

BOOKINGSCash paid by users and advertisers in the period

RESEARCH & DEVELOPMENT

Salaries and benefits for software engineers and developers

Outside services and consulting; allocated facilities and overhead

SALES & MARKETING

Player acquisition costs; general branding and marketing costs

Salaries and benefits for sales and marketing team

GENERAL & ADMINISTRATIVE

Salaries and benefits for executive, finance, legal, & HR teams

Outside legal and consulting services; charitable donations© Investors’ Mosaic, Inc. www.investorsmosaic.com

How Zynga Makes Money

NEW GAMES

EXISITING GAMES

MONTHLY UNIQUE USERS

DAILY ACTIVE USERS

UNIQUE PAYERS

BOOKINGS PER UNIQUE PAYER

BOOKINGS


Zynga-at-a-Glance


KEY METRICS

1) Monthly Unique Users: How many unique players per month2) Monthly Average Users: How many games played per month3) Daily Average Users: How many games played per day4) Unique Payers: How many unique individuals paid for items5) Bookings: Cash collected from virtual goods and advertising6) Unique Bookings per Unique Payers: Bookings per unique payer7) DAU as % of MAU: Indicates user engagement


Total Bookings Have Stalled, but Steady Improvement in Underlying Trends


Zynga is Becoming Increasingly Effective at Monetizing its User Base


• Zynga’s obsession with A/B testing and data analysis, allows the company to take a scientific process to making decisions geared towards making more money.•Continuous product updates allows Zynga

to add components to the game that drive additional revenue opportunity.•As Zynga adds new game genres, they

should be able to capture a more diverse set of paying customers.

User Base Has Stagnated as Game Releases Slowed in 1H 2011, but Monetization Up

•Notice the decline in MAU and DAU throughout 2010. This was due to Facebook limiting Zynga games from posting game updates on Friend’s walls.• MAU and DAU have been in decline in

2011 due to a limited slate of new games. But MUU has held steady.•Despite the stagnate user growth, Zynga is

more effectively getting active users to buy virtual goods.


User Engagement (While High) is Trending Lower

•With approximately 25% of monthly users playing a game on a daily basis, this is a high degree of engagement. However, the level is flat to declining. This calls into question the longevity of Zynga games due to their formulaic nature.• Same trend with DAU as % of MUU.• The number of games users play per day is

also declining. Does this mean saturation?


Zynga Games Have Some Longevity, and the Company is Diversifying it’s Revenue Base


2008 2009 2010 9M 2010 9M 2011 % Change

Zynga Poker 14 39 120 80 124 55%Mafia Wars 4 47 167 129 116 -10%FarmVille - - 179 116 224 93%FrontierVille - - - - 133 nmCityVille - - - - 91 nmTotal for Top Games 18 86 466 325 688

Total Revenue 19 121 597 402 829 % of Total 93% 71% 78% 81% 83%

Revenues: 9M 2011

Zynga Needs to Innovate Rapidly to Offset User Attrition and Maintain Growth


Source: VentureBeat. Zynga: Behind the IPO. http://bit.ly/ryiKbW

• This chart says it all. It shows how quickly users disengage with new games.• This means that

Zynga needs to bring new games to market quickly to offset user defection•Also, without huge

“hits”, Zynga will have a hard time growing.•However, even

though users decline, bookings per game climb for several quarters.

Based on FarmVille, Games Monetize Over 2+ Years


• These charts imply that previous page’s graph does not accurately reflect how Zynga monetizes games.• This information implies that the initial spike in users is a function of Zynga amazing

distribution and cross-marketing platform, while the monetization scheme develops over time as the “power users” continue playing and Zynga iterates the game based upon users interactions and decisions.•While FarmVille is one of Zynga’s biggest hits, management indicated that this trend is

representative of other games.

Source: Zynga’s Retail Road Show Presentation

* See our website to download the full Excel file at www.investorsmosaic.com (but be forewarned, this is premium content)


Financials

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Summary Income Statement


2008 2009 2010 2011E 2012E 2013E 2014E

Revenue 19.4 121.5 597.5 1,167.6 1,603.0 2,027.1 2,277.7 Cost of Revenue 10.0 56.7 176.1 308.4 392.6 455.9 489.5 Gross profit 9.4 64.8 421.4 859.2 1,210.4 1,571.2 1,788.2

Research & Development 12.2 51.0 149.5 414.3 726.0 938.8 1,042.0 Sales & Marketing 11.0 42.3 114.2 170.1 223.8 265.5 286.8 General & Administrative 8.8 24.2 32.3 155.9 164.7 185.3 198.3 Total Operating Expenses 32.0 117.5 295.9 740.3 1,114.5 1,389.6 1,527.1

Operating Income (22.6) (52.8) 125.5 118.8 95.9 181.6 261.1

Interest Income (Expense) 0.3 0.2 1.2 1.6 1.5 1.5 2.5 Other Income (Expense) 0.2 (0.2) 0.4 (0.4) 0.4 0.3 0.5 Pre-tax Income (22.1) (52.8) 127.1 120.1 97.7 183.3 264.0

Taxes 0.0 0.0 36.5 74.1 38.8 64.2 92.4 Tax rate 0.0% 0.0% 28.7% 61.7% 39.8% 35.0% 35.0%

Net Income (Loss) (22.1) (52.8) 90.6 46.0 58.9 119.2 171.6

Deemed Dividend to Series B-2 - - 4.6 - - - - Attrituable to Participating Securities - - 58.1 30.7 - - - Net Income (Loss) B & C Shares (22.1) (52.8) 27.9 15.3 58.9 119.2 171.6

EPS (0.18)$ (0.31)$ 0.08$ 0.02$ 0.08$ 0.15$ 0.21$

Adjusted EBITDA 4.5 168.2 392.7 322.9 334.1 483.8 600.3

Shares Outstanding 120.0 171.8 329.3 714.0 741.2 786.7 810.3

ESTIMATES

Summary Income Statement


Margins 2008 2009 2010 2011E 2012E 2013E 2014EGross Margin 48.4% 53.3% 70.5% 73.6% 75.5% 77.5% 78.5% bps change 49 172 31 19 20 10

EBITDA Margin 23.4% 138.5% 65.7% 27.7% 20.8% 23.9% 26.4% bps change 1,150 (727) (381) (68) 30 25 Operating Margin -116.3% -43.5% 21.0% 10.2% 6.0% 9.0% 11.5% bps change 729 645 (108) (42) 30 25 Net Margin -113.8% -43.5% 4.7% 1.3% 3.7% 5.9% 7.5%

bps change 703 482 (34) 24 22 17

Incremental Gross Profit Margin 54.3% 74.9% 76.8% 80.7% 85.1% 86.6%Incremental EBITDA Margin 160.3% 47.2% -12.2% 2.6% 35.3% 46.5%Incremental Operating Margin -29.6% 37.4% -1.2% -5.3% 20.2% 31.7%

As % of RevenueResearch & Development 62.6% 42.0% 25.0% 35.5% 45.3% 46.3% 45.8%Sales & Marketing 56.6% 34.8% 19.1% 14.6% 14.0% 13.1% 12.6%General & Administrative 45.5% 20.0% 5.4% 13.4% 10.3% 9.1% 8.7%Total Operating Expenses 164.7% 96.8% 49.5% 63.4% 69.5% 68.6% 67.0%

YOY % ChangeBookings 562% 110% 39% 35% 26% 12%Revenue 526% 392% 95% 37% 26% 12%Gross profit 589% 551% 104% 41% 30% 14%Research & Development 320% 193% 177% 75% 29% 11%Sales & Marketing 285% 170% 49% 32% 19% 8%General & Administrative 174% 33% 384% 6% 13% 7%Total Operating Expenses 268% 152% 150% 51% 25% 10%

Adjusted EBITDA 3597% 134% -18% 3% 45% 24%Operating Income 134% -338% -5% -19% 89% 44%Net Income (Loss) 139% -272% -49% 28% 102% 44%EPS 67% -128% -75% 271% 91% 40%Share Count 43% 92% 117% 4% 6% 3%

Margins 2008 2009 2010 2011E 2012E 2013E 2014EGross Margin 48.4% 53.3% 70.5% 73.6% 75.5% 77.5% 78.5% bps change 49 172 31 19 20 10

EBITDA Margin 23.4% 138.5% 65.7% 27.7% 20.8% 23.9% 26.4% bps change 1,150 (727) (381) (68) 30 25 Operating Margin -116.3% -43.5% 21.0% 10.2% 6.0% 9.0% 11.5% bps change 729 645 (108) (42) 30 25 Net Margin -113.8% -43.5% 4.7% 1.3% 3.7% 5.9% 7.5%

bps change 703 482 (34) 24 22 17

Incremental Gross Profit Margin 54.3% 74.9% 76.8% 80.7% 85.1% 86.6%Incremental EBITDA Margin 160.3% 47.2% -12.2% 2.6% 35.3% 46.5%Incremental Operating Margin -29.6% 37.4% -1.2% -5.3% 20.2% 31.7%

As % of RevenueResearch & Development 62.6% 42.0% 25.0% 35.5% 45.3% 46.3% 45.8%Sales & Marketing 56.6% 34.8% 19.1% 14.6% 14.0% 13.1% 12.6%General & Administrative 45.5% 20.0% 5.4% 13.4% 10.3% 9.1% 8.7%Total Operating Expenses 164.7% 96.8% 49.5% 63.4% 69.5% 68.6% 67.0%

YOY % ChangeBookings 562% 110% 39% 35% 26% 12%Revenue 526% 392% 95% 37% 26% 12%Gross profit 589% 551% 104% 41% 30% 14%Research & Development 320% 193% 177% 75% 29% 11%Sales & Marketing 285% 170% 49% 32% 19% 8%General & Administrative 174% 33% 384% 6% 13% 7%Total Operating Expenses 268% 152% 150% 51% 25% 10%

Adjusted EBITDA 3597% 134% -18% 3% 45% 24%Operating Income 134% -338% -5% -19% 89% 44%Net Income (Loss) 139% -272% -49% 28% 102% 44%EPS 67% -128% -75% 271% 91% 40%Share Count 43% 92% 117% 4% 6% 3%

Balance Sheet


BALANCE SHEET 2008 2009 2010 2011E 2012E 2013E 2014ECash & Equivalents 127 188 1,440 1,633 1,969 2,290 Marketable Securities 73 550 321 321 321 321 Accounts Receivable 7 80 136 187 236 266 Income Tax Receivable 11 37 4 6 7 8 Deferred Tax Assets - 24 28 36 46 51 Restricted Cash 1 3 4 4 4 4 Other Current Assets 3 24 40 52 66 74 Total Current Assets 222 906 1,974 2,239 2,649 3,014

L-T Marketable Securities - - 1 1 1 1 Goodwill - 60 95 95 95 95 Other Intangible Assets 1 44 44 56 70 79 PP&E 35 75 256 376 485 621 Restricted Cash - 14 21 21 21 21 Other L-T Assets 1 13 34 41 51 58 Total Assets 259 1,113 2,425 2,828 3,372 3,888

Accounts Payable 22 33 58 74 86 93 Other Current Liabilities 35 79 115 147 186 209 Deferred Revenue 178 408 496 640 809 909 Total Current Liabilities 235 521 670 862 1,082 1,211

L-T Deferred Revenue 46 57 26 34 42 48 L-T Deferred Taxes - 14 15 15 15 15 Other Non-Current Liabilities - 39 72 95 121 136 Total Liabilities 280 630 783 1,005 1,260 1,409

Shareholders' Equity (21) 482 1,642 1,823 2,112 2,479 Total Liabilities & Equity 259 1,113 2,425 2,828 3,372 3,888

Balance Sheet AnalysisAccounts Receivable Turn 17.0 7.5 8.6 8.6 8.6 8.6 Accounts Receivable Days 21.5 48.9 42.6 42.6 42.6 42.6

Accounts Payable Turn 2.6 5.3 5.3 5.3 5.3 5.3 Days Payable Outstanding 138.4 69.3 69.0 69.0 69.0 69.0

Income Tax Receivable as % of sales 9.3% 6.1% 0.4% 0.4% 0.4% 0.4%Deferred Tax Assets as % of sales 0.0% 4.1% 2.4% 2.3% 2.2% 2.2%Other Current Assets as % of sales 2.5% 4.1% 3.5% 3.2% 3.2% 3.2%Other Intangible Assets as % of sales 0.9% 7.4% 3.8% 3.5% 3.5% 3.5%Other L-T Assets as % of sales 0.7% 2.2% 2.9% 2.6% 2.5% 2.5%

Other Current Liabilities as % of sales 28.8% 13.2% 9.9% 9.2% 9.2% 9.2%Deferred Revenue as % of sales 146.6% 68.4% 42.5% 39.9% 39.9% 39.9%L-T Deferred Revenue as % of sales 37.6% 9.5% 2.2% 2.1% 2.1% 2.1%Other Non-Current Liabilities as % of sales 0.0% 6.5% 6.2% 5.9% 6.0% 6.0%

Cash Flow


CASH FLOW STATEMENT 2008 2009 2010 2011E 2012E 2013E 2014ENet Income (22.1) (52.8) 90.6 46.0 58.9 119.2 171.6 D&A 2.9 10.4 39.5 89.1 119.7 151.7 163.7 Stock-Based Comp Expense 0.7 3.7 23.8 77.7 122.0 170.0 195.0 Impairment of Purchased Technology 1.9 - - - - - - Loss on Equity Method - 0.1 0.6 - - - - Gains on Sale of Investments - - - (1.4) - - - Common Stock Warrants - 0.3 1.9 15.6 - - - Accretion & Amortization (0.0) 0.1 1.7 2.2 - - - Excess Tax Benefits - - (39.7) 2.0 - - - Benefits of Deferred Income Taxes - - (8.5) - - - - Accounts Receivable (2.8) (4.4) (69.5) (56.0) (50.8) (49.5) (29.2) Income Tax Receivable (0.8) (10.5) (25.3) 32.2 (1.3) (1.5) (0.9) Other Assets (0.3) (3.1) (32.5) (48.3) (37.2) (48.4) (28.8) Accounts Payable 4.9 16.2 10.6 24.7 15.9 12.0 6.4 Deferred Revenue 16.5 206.6 241.4 57.1 151.2 178.2 105.3 Other Liabilities 10.5 24.3 91.8 63.3 54.9 64.2 37.9 Cash From Operations 11.5 191.0 326.4 304.3 433.4 596.0 621.0

Purchase of Marketable Securities (10.0) (125.1) (804.5) (512.6) - - - Sales of Marketable Securities - - 4.2 12.6 - - - Maturities of Marketable Securities - 62.4 319.8 725.3 - - - Capex (4.6) (38.8) (56.8) (247.7) (240.0) (260.0) (300.0) Acquisition of Purchased Technology (6.0) (0.6) (1.1) (3.7) - - - Business Acquisitions - (0.5) (62.3) (38.0) - - - Restricted Cash (0.2) (0.5) (16.5) (7.7) - - - Repayment of Employee Receivable 0.1 - - - - - - Proceeds from Sale of Investment - - - 2.0 - - - Other Investing Activities (0.5) (0.2) (0.3) (0.9) - - - Cash Used in Investing (21.2) (103.4) (617.4) (70.6) (240.0) (260.0) (300.0)

Proceeds from IPO - - - 816.4 - - - Repurchase of Common Stock (0.0) - (1.5) (283.8) - - - Exercise of Stock Options 0.0 0.0 3.4 2.2 - - - Excess Tax Benefits from Options - - 39.7 (2.0) - - - Proceeds from Preferred Stock 29.5 14.2 305.2 485.3 - - - Exercise of Warrants - - - 0.0 - - - Proceeds from Contigent Warrant - - 4.6 - - - - Cash From Financing 29.5 14.2 351.4 1,018.1 - - -

Effect of Exchange Rate - - 0.1 0.0 - - - Change in Cash 19.9 101.8 60.5 1,251.8 193.4 336.0 321.0

Valuation


Our Valuation Analysis Suggests $9.25 is a Fair Price for the Stock Right Now


Base Case (15% discount rate) 2011 2012 2013 2014Revenue Multiple 5.5x 5.5x 5.5x 5.5xImplied Market Cap 6,422 8,816 11,149 12,527 Shares Outstanding (in millions) 714 741 787 810 Per Share 8.99$ 11.90$ 14.17$ 15.46$ NPV 8.99$ 10.34$ 10.72$ 10.17$ Average 9.58$

EBITDA Multiple 15.0x 15.0x 15.0x 15.0xImplied Enterprise Value 4,844 5,012 7,257 9,004 Implied ValuationPlus: Cash 1,440 1,633 1,969 2,290 Stock Price 9.28$ Implied Market Cap 6,284 6,645 9,226 11,295 Market Cap (in Billions) 6,630 Shares Outstanding (in millions) 714 741 787 810 Per Share 8.80$ 8.97$ 11.73$ 13.94$ NPV 8.80$ 7.80$ 8.87$ 9.17$ Average 8.98$

Earnings Multiple 30.0x 30.0x 30.0xImplied Market Cap 1,870 3,540 5,091 Shares Outstanding (in millions) 741 787 810 Per Share 2.52$ 4.50$ 6.28$ NPV 2.19$ 3.40$ 4.13$

Base Case (15% discount rate) 2011 2012 2013 2014Revenue Multiple 5.5x 5.5x 5.5x 5.5xImplied Market Cap 6,422 8,816 11,149 12,527 Shares Outstanding (in millions) 714 741 787 810 Per Share 8.99$ 11.90$ 14.17$ 15.46$ NPV 8.99$ 10.34$ 10.72$ 10.17$ Average 9.58$



Bull Case & Bear CaseUpside Case (15% discount rate) 2011 2012 2013 2014Revenue Multiple 6.5x 6.5x 6.5x 6.5xImplied Market Cap 7,590 10,419 13,176 14,805 Shares Outstanding (in millions) 714 741 787 810 Per Share 10.63$ 14.06$ 16.75$ 18.27$ NPV 10.63$ 12.22$ 12.67$ 12.01$ Average 11.32$



Downside Case (15% discount rate) 2011 2012 2013 2014Revenue Multiple 4.0x 4.0x 4.0x 4.0xImplied Market Cap 4,670 6,412 8,109 9,111 Shares Outstanding (in millions) 714 741 787 810 Per Share 6.54$ 8.65$ 10.31$ 11.24$ NPV 6.54$ 7.52$ 7.79$ 7.39$ Average 6.97$


Earnings Multiple 20.0x 20.0x 20.0x 20.0xImplied Market Cap 1,545 1,247 2,360 3,394 Shares Outstanding (in millions) 714 741 787 810 Per Share 2.16$ 1.68$ 3.00$ 4.19$ NPV 1.88$ 1.46$ 2.27$ 2.75$


Valuation Comparisons


Stock PriceMarket Cap

($ in BN)EV

($ in BN)Price /

2011 SalesPrice /

2012 SalesPrice /

2012 EPSPEG

Ratio12 Revenue

Growth12 EPS Growth

Price / TTM EBITDA

Gross Margin

EBITDA Margin

Operating Margin ROA ROE

Google 627.68$ 203.41 167.34 6.9x 5.7x 14.3x 0.8 23% 19% 12.4x 26.8% 45.9% 32.8% 12.0% 19.5%Amazon 197.22$ 89.69 82.91 1.8x 1.4x 96.2x 1.4 33% 69% 47.4x 2.0% 3.6% 2.5% 4.1% 12.3%Salesforce 124.76$ 16.97 16.90 7.5x 5.8x 76.5x 3.4 29% 23% 185.9x 0.2% 4.0% -1.4% -0.6% 0.3%Red Hat 51.91$ 10.01 9.05 8.9x 7.7x 44.8x 4.3 15% 10% 40.1x 12.9% 20.0% 17.1% 5.2% 10.4%LinkedIn 72.95$ 7.12 6.44 14.1x 9.0x 291.8x 0.4 56% 733% 120.8x 2.4% 10.5% 5.3% 3.6% 4.0%Tibco 28.69$ 4.63 4.40 5.1x 4.5x 25.8x 1.4 12% 18% 22.8x 11.2% 21.2% 16.5% 7.5% 12.2%Pandora 11.04$ 1.78 1.68 6.5x 4.3x 0 nm 51% -50% nm -3.9% -180.5% -1.7% -2.0% -12.6%Zillow 23.10$ 0.64 0.54 9.9x 6.7x 77.0x 0.6 48% 131% 124.5x -0.6% 6.7% 2.8% N/A N/AHomeaway 24.84$ 2.00 1.86 8.7x 6.9x 43.6x 2.0 25% 21% 51.6x 2.2% 15.7% 9.2% N/A N/AGroupon 19.35$ 12.34 11.90 7.7x 5.2x 138.2x nm 49% -122% nm -40.9% -22.8% -30.5% N/A N/AGreen Mountain 57.71$ 8.92 9.68 2.1x 1.6x 15.9x 0.4 32% 41% 19.6x 7.5% 11.6% 14.3% 10.4% 15.3%Lululemon 48.17$ 6.91 6.66 7.2x 5.6x 32.8x 1.3 29% 26% 24.6x 18.9% 28.1% 27.9% 28.9% 38.8%Rackspace 43.21$ 5.66 5.70 5.5x 4.4x 54.0x 1.1 27% 51% 21.0x 6.8% 26.6% 11.2% 7.7% 13.5%Equinix 103.19$ 4.89 6.90 3.1x 2.6x 38.5x 1.0 18% 40% 11.2x 5.9% 38.6% 18.7% 3.5% 4.6%VM Ware 97.95$ 41.35 37.46 11.0x 9.1x 39.0x 2.3 20% 17% 43.2x 18.2% 23.1% 18.4% 5.9% 16.1%EMC 23.90$ 48.74 46.73 2.4x 2.2x 13.9x 0.9 11% 15% 10.5x 11.7% 22.4% 17.7% 7.0% 13.2%NetSuite 47.10$ 3.20 3.09 13.6x 10.9x 224.3x 5.6 25% 40% nm -13.8% -7.0% -12.9% -7.8% -27.6%Apple 393.86$ 366.06 339.32 2.6x 2.3x 10.1x 0.8 15% 12% 9.5x 24.0% 25.6% 31.2% 22.1% 41.7%Electronic Arts 23.01$ 7.61 6.56 1.8x 1.7x 18.6x 0.6 3% 33% 91.1x -7.5% 1.7% -2.8% -1.4% -11.2%

Average 6.6x 5.1x 69.7x 1.7 27% 59% 52.3x 4.4% 5.0% 9.3% 6.6% 9.4%

• It’s hard to anticipate how the market will treat Zynga in terms of valuation, but it’s definitely more akin to the high-tech, social media brethren such as LinkedIn, Groupon, Salesforce, and Pandora. However, Zynga reliance on Facebook will likely cap valuation to some degree (rightfully so).

• We think a comparison against Electronic Arts or Take Two is unfair as Zynga is an entirely different business model that happens to sell games.

The IPO Details


Large Share Count and Huge Number of Potentially Dilutive Shares Should be Noted


The size of Zynga’s share count will make earnings leverage more muted than the market probably realizes.

Questions You Should Be Asking Management


Questions We Want to Ask Management1) How are you planning on transitioning to Platform Z without upsetting

Facebook? They surely won’t want to lose the 30% revenue split from you.2) How do you make sure that users do not get burn-out from games that are

becoming increasingly formulaic?3) Please provide cohort data on your top 5 games (show how Bookings, Revenue,

DAU, and MAU have performed since launch).4) Why are you building your own data centers? How much money will this require

over the next two years? How much will is save over the L-T?5) How do you identify good development talent? How do you retain these

employees in such a competitive environment?6) What is the implication of durable goods becoming a larger % of revenue than

consumable goods? We would think that consumable goods are more attractive to Zynga.

7) What is the implication of your estimate for the average life of a durable virtual good peaked in 2009 at 19 months, and declined from 18 in the 9M ending 2010 to 15 months in the 9M ending 2011?

8) Why did Mr. Van Natta resign? He was the highest paid executive, so he must have been valuable.

9) What game genres are not applicable to social gaming?© Investors’ Mosaic, Inc. www.investorsmosaic.com

Conclusion• Zynga is a gaming and data analytics company, focused on games that appeal

to the mass market and incorporates social engagement.• The business model is a new paradigm in gaming, focused rapid iteration of

new games and updates, viral adoption due to the Facebook platform, cross-marketing, and low-cost failures.

• Zynga is obsessed with building repeatable and scalable processes. They have built their own statistical analysis system, which is enables them to make data-driven decisions to improve user monetization.

• They are very dependent on a healthy relationship with Facebook. Approximately 93% of revenue came through FB platform.

• In order to reduce their dependence on Facebook, Zynga is expanding internationally and onto additional platforms (Google + and Mobile).

• The IPO price of $9.25 seems fair for the potential of the business, but also the risks it faces over the next 12-18 months as it attempts to reduce it’s reliance on Facebook.

• We would like to see meaningful traction from new game releases and mobile expansion before getting more aggressive on valuation.


Appendices


The Competition

• Electronic Arts• Disney• Take Two Interactive• Tencent• Gree (Japan)• Nexon (Japan)• Crowdstar (private)• Vostu (private)• DeNA Co (mobile)• Rovi (mobile)• Gameloft (mobile)• Glu Mobile (mobile)


Key Metrics Zynga is not Providing

• Concurrent Users Statistics– How many people are on the system at the same time

• Cohort analysis for each game: users, bookings, and revenue• Engineers to user base (this is a key metric for Facebook)

– At FB, it’s 1M users per engineer


Key Financial Metrics Descriptions• Bookings: Revenue collected in the current time period.

• Daily Average Users (DAUs): The number of individuals who played one of our games during a particular day. Under this metric, an individual who plays two different games on the same day is counted as two DAUs. DAU is a measure of audience engagement.

• Monthly Average Users (MAUs): The number of individuals who played a particular game in the 30-day period ending with the measurement date. Under this metric, an individual who plays two different games in the same 30-day period is counted as two MAUs. Similarly, an individual who plays the same game on two different platforms (e.g., web and mobile) or on two different social networks in a 30-day period would be counted as two MAUs. MAU is a measure of total game audience size.

• Monthly Unique Users (MUUs): The number of unique individuals who played any of our games on a particular platform in the 30-day period ending with the measurement date. An individual who plays more than one of our games in a given 30-day period would be counted as a single MUU. MUU is a measure of total audience reach across our network of games.

• Average Bookings per User (ABPU): Total bookings in a given period, divided by (i) the number of days in that period, divided by, (ii) the average DAUs during the period. ABPU is a measure of overall monetization across all of our players through the sale of virtual goods and advertising.


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Zynga Stock Analysis