We put Zynga into the fund shortly after their very lackluster IPO. Why?
- First and foremost Zynga has a fabulous business: rapid revenue growth to reach a $1B run rate combined with 20% operating margins and $1.8B in cash. These are some of the strongest financials anywhere in the technology space.
- Zynga is dominating a huge new market. Casual gaming is a big trend and the online social element adds new levels of engagement and expands the market even further. Although personally I am not a big fan of online gaming, hundreds of millions of people are. The adoption of mobile devices and and more social gaming options continues to drive the market.
- The established gaming companies like Electronic Arts and Activision have largely missed this major shift in the market. Zynga has developed a different approach to not just building and launching games but one of seeing games as evolving interactive content platforms that demand a mindset, development process and business strategy all geared to this.
- Investors disliked the company from the start and have so far tended to focus on the negative aspects of the company rather than the positives. The founder and CEO is a controversial figure but that in itself isn’t a reason to avoid the company. The same can be said about Andrew Mason (GroupOn), Mark Zuckerberg (FaceBook) and the late Steve Jobs (Apple.) It remains to be seen how Marc Pincus leads Zynga as a public company.
Underscoring all the fundamentals is our IV estimate of $25 for the shares which has been well below prevailing market prices since their IPO.
Zynga is a name that demands careful watching and more frequent reviews of our investment case and IV estimate. However today we are confortable owning the shares in an era of increasing mobile, social and casual gameplay.