(This is an excerpt from an article I originally published on Seeking Alpha on April 24, 2012. Click here to read the entire piece.)
This post is a follow-up to one I wrote last week titled “Time to Buy Zynga Ahead of the Facebook IPO.” In that post, I provided a very rough upside price target on Zynga (ZNGA) based on Facebook’s (FB) disclosure that ZNGA accounts for 12% of its revenue. I decided to dig a little deeper into the numbers to see whether I could get a bit more precise on this relative valuation. {snip}
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Regardless, Facebook and ZNGA are strong co-dependents with mutual interests in the viability of each the integrated business models. I daresay that one day Facebook may decide to acquire ZNGA because of its dependence on the success of the company’s games even as it seeks to diversify its revenue base. I will save such speculation for a later day after we see what Facebook does with its IPO riches.
These numbers mean that I will stick by the well-publicized 12% Facebook-from-Zynga revenue share number as a starting point to calculate a relative valuation for ZNGA, but I also recognize that I could justify using a higher number based on the linkage with display advertising. Assuming Facebook gets a $90B valuation (10% lower than the $100B still bandied about), ZNGA should get at least a $10.8B valuation. Given ZNGA’s current $6.49B valuation and $9 stock price, I get a rough upside target of $15. Using the 19% Facebook-from-Zynga revenue share, I get a rough upside target as much as $24. Again, a more conservative approach makes sense based on Facebook’s potential to diversify its revenue away from ZNGA.
The main point here is that if you are interested in buying into the Facebook IPO, Zynga is currently a much cheaper way to buy into the hype. {snip}
Click image for a larger view…
Source: FreeStockCharts.com
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Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on April 24, 2012. Click here to read the entire piece.)
Full disclosure: long ZNGA shares and calls