Zynga's IPO Goals Are Neither Massive nor a Massive Letdown

The Internet gaming company filed documents on Friday morning indicating that it intends on raising somewhere between $850 million and $1.15 billion for its public offering, raising $15 million more than it previously estimated.

The Internet gaming company filed documents on Friday morning indicating that it intends on raising somewhere between $850 million and $1.15 billion for its public offering, staying close to previous estimates. Earlier this year, when Zynga first announced its IPO intentions, the company had floated a $1 billion goal, which as we noted, ranked it up there with Google.

The company is looking to sell 100 million shares at $8.50 to $10 a share, valuing the company at a maximum $7 billion. Yes, that is less than the rumor mill predicted, but still quite high. Earlier this week, Forbes's Eric Jackson estimated a $20 billion valuation;  by Tuesday that number dropped to $10 billion, rumored Reuters; and today we get a best-circumstances $7 billion. The lowered expectations could have something to do with "tempered expectations for I.P.O.’s," explains DealBook's Evelyn M. Rusli. Yet, it's not all bad news: its goal is still the biggest IPO since Google's $1.67 billion sale in 2004. And in the realm of gaming companies it will rival the public valuation of Electronic Arts, which, as AllThingsD's Tricia Duryee notes, hovers around $7.8 billion. That's of course, if things go well.

After Groupon's big IPO bonanza let-down, Zynga has certainly scaled back its ambitions. As we saw with Groupon, the bubble popped pretty much right after the company went public. Groupon has lost $4 billion in market capitalization in just a few weeks, notes Rusli. Zynga's hoping to learn from that experience. “It’s a reflection of what we’ve seen in Groupon,” David Dillon, a San Francisco-based portfolio manager at HighMark Capital Management, told Bloomberg's Douglas MacMillan, Brian Womack and Lee Spears. “If you price yourself too high, you do yourself a disservice in the long term." And as an opening act for Facebook's impending IPO, Facebook's hoping it has.

Sadly, like Groupon, Zynga's future is suspect. The company recorded $30.7 million in earnings earlier this year, but those numbers might have come from murky accounting, suspects Business Insider's Henry Blodget. Here's the math:

Last year, for the first six months of 2010, Zynga amortized revenue from virtual goods using an expected useful life of 14 months. In other words, $5 of fertilizer a Farmville player bought anytime over the past 14 months would be spread over the next 14 months, so that Zynga booked about $0.36 of revenue per month.

But for the first six months of this year, Zynga shortened its amortization schedule to 11 months instead of 14 months. This means that, for every $5 of Farmville fertilizer sold, the company will book $0.45 of revenue per month for 11 months.

And that, in turn, means that Zynga's reported revenue from these sales is considerably higher than it would have been had Zynga left its amortization schedule unchanged. (It also means that revenue in the 5th quarter will be lower, because all of the revenue from today's sale will already have been exhausted).

All in all, he guesses, Zynga fudged about $27 million in revenue, which would wipe out all of its $18 million in profits. But even if Blodget's reasoning doesn't add up, the company's growth has stagnated. "After hitting an average of 236 monthly unique users in the first quarter, the game maker has pulled back modestly," notes Rusli. "Attracting and keeping new users is critical, since only a small percentage of Zynga’s users actually purchase virtual goods."