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The numbers: WSJ reports $400 million in profits on $850 million in revenue. $7 billion puts them at a 17.5 p/e ratio, or about in line with 3M, Pepsi and McDon

by cjlars 16y ago

The numbers: WSJ reports $400 million in profits on $850 million in revenue. $7 billion puts them at a 17.5 p/e ratio, or about in line with 3M, Pepsi and McDonalds. Netflix and Amazon, by comparison, are trading at a p/e of over 70. Facebook is around 50. Activision Blizzard - 34. Electronic Arts has about $3.6 billion in revenue, is losing money, and is valued at about $6 billion. I'd say it's fair compared to the rest of the market.

jacques_chester 16y ago
P/E is a good start and theirs looks good next to the others you listed. But I'd be more interested in profit-per-user and profit-per-employee. I think they had 200 million unique players, that puts profit-per-player at around $2/year. With 1500 employees it's ~$266,000 profit per employee per year. Very respectable, given that Google gets around $120,000/emp/year.
- cjlars 16y ago
  I agree and I'm not entirely sure that the company can sustain the same level of profitability, given the fickleness of gamers. My big worry is that their profit margins return to industry average levels. There's plenty of reason to believe that they would earn closer to 5 or 10 percent vs. the ~%45 they currently get as time goes on. In that case, the company needs to grow to several billion dollars in revenue and become one of the largest game publishing companies in the world to support this valuation. I'm not entirely sure I see that happening for Zynga.
  - jacques_chester 16y ago
    I'm not so sure. Zygna's model is less like conventional computer games (once-off payment or lately recurring payment) and much more like slots machine gambling. People get a little rush from their pointless achievements and are prepared to pay for it. Given that the product has almost zero distribution costs, I expect profits to remain high. Even competition is going to struggle to bring down those profits, because of the same network effects Facebook now enjoys over competitors.
hessenwolf 16y ago
Another way of looking at that p/e is that it is 17.5 years earnings just to pay back your investment. Let's just call it ten, allowing for growth but also considering some hefty risk discounting, and allowing for the reduction in margin due to competition (mentioned in another comment). This is a market that is three years old, and massively susceptible to discontinuities - specifically newcomers and legal changes. I postulate that they will avoid paying dividends for at least a decade, perhaps throwing out a mangy 10% stock buyback (after issuing 11% in stock options to employees). I am inclined to put on even more risk discount. Personally, I'd invest at a p/e of 4, maybe, but keep in mind that I don't really know what they do; so I suppose I will change that to a p/e of 3.2, and let's round it off to 3.

by cjlars 16y ago

jacques_chester 16y ago

P/E is a good start and theirs looks good next to the others you listed. But I'd be more interested in profit-per-user and profit-per-employee. I think they had 200 million unique players, that puts profit-per-player at around $2/year. With 1500 employees it's ~$266,000 profit per employee per year. Very respectable, given that Google gets around $120,000/emp/year.

cjlars 16y ago
I agree and I'm not entirely sure that the company can sustain the same level of profitability, given the fickleness of gamers. My big worry is that their profit margins return to industry average levels. There's plenty of reason to believe that they would earn closer to 5 or 10 percent vs. the ~%45 they currently get as time goes on. In that case, the company needs to grow to several billion dollars in revenue and become one of the largest game publishing companies in the world to support this valuation. I'm not entirely sure I see that happening for Zynga.
- jacques_chester 16y ago
  I'm not so sure. Zygna's model is less like conventional computer games (once-off payment or lately recurring payment) and much more like slots machine gambling. People get a little rush from their pointless achievements and are prepared to pay for it. Given that the product has almost zero distribution costs, I expect profits to remain high. Even competition is going to struggle to bring down those profits, because of the same network effects Facebook now enjoys over competitors.

hessenwolf 16y ago

Another way of looking at that p/e is that it is 17.5 years earnings just to pay back your investment. Let's just call it ten, allowing for growth but also considering some hefty risk discounting, and allowing for the reduction in margin due to competition (mentioned in another comment). This is a market that is three years old, and massively susceptible to discontinuities - specifically newcomers and legal changes. I postulate that they will avoid paying dividends for at least a decade, perhaps throwing out a mangy 10% stock buyback (after issuing 11% in stock options to employees). I am inclined to put on even more risk discount. Personally, I'd invest at a p/e of 4, maybe, but keep in mind that I don't really know what they do; so I suppose I will change that to a p/e of 3.2, and let's round it off to 3.