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2 December 2011 By Robert Cyran

Delay has taken the shine off Zynga’s initial public offering, which could value the company at $9 billion. Revenue at the maker of FarmVille and other Internet games is still rising fast, according to a revised prospectus filed on Dec. 2. But on more telling measures, growth has slowed.

Nearly all of the company’s revenue comes from the sale of virtual goods. When a player buys a digital tractor to grow more crops, Zynga collects the cash up front but recognizes the revenue over the time it expects the player to use the item. Questions over how these sales of virtual goods should be accounted for were one reason the IPO was delayed.

Over the first nine months of 2011, Zynga booked $829 million of revenue, more than double the figure for the same period in 2010. But look at the amount of cash collected from players last quarter compared to the one before, and it’s almost flat. Previously, that figure had grown steadily and quickly. If cash inflows are flattening out, revenue too will soon stop growing so fast.

Meanwhile, nearly all of Zynga’s revenue comes from games played on Facebook. It could be that slowing growth at the social network has had a knock-on effect at Zynga. Perhaps social gaming is maturing. Increased competition could be biting. Or maybe Zynga just needs a few new games. It hasn’t released any since the spring, and has several scheduled for launch in the next few months.

Despite all this, the indicated IPO valuation range doesn’t appear particularly stretched. The company generated $283 million of cash from operations over the past 12 months. Take out the cash it will have on its books after going public, and the company’s value at the top of the range is about 25 times trailing cash from operations. That’s a good bit easier to swallow than red-ink spewing Groupon, which still has a higher market value despite the recent drop in its shares below its IPO price.

Yet slowing growth means investors will be more skeptical of Zynga’s prospects than they were earlier this year. Indeed, the company was worth about $15 billion in grey market trading over the summer. Zynga can’t complain about a $9 billion price tag. But it might have been even higher had it harvested investors’ cash earlier.


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