Wednesday, August 8, 2012 markets are bonkers

Am I missing something?

Zynga is currently trading at 120% of book value.  Granted their revenue growth has been anemic, but this valuation basically assumes the company will barely grow again.  Furthermore it assumes the company will barely break a profit...FOREVER.

It is very interesting to compare Zynga vs Tencent, the leading Chinese gaming company whose primary revenue stream (virtual goods) is very similar to Zynga. Investors in Chinese equity markets are flocking to Tencent (e.g. Google Finance Tencent v. Hang Seng Index) because they see the company as having a reliable revenue stream when compared to the rest of China.

One major financial difference between Tencent and Zynga is that when Tencent passed the $1B revenue mark in 2008, it was operating with a 40% profit margin and it continues to maintain a very healthy 35-40% profit margin while growing to over $4.5B in revenues.

I have faith that the Zynga team is extremely motivated and capable of breaking through its current operational issues (mobile cannibalization, user growth and margins).  When it does, the current $2.2B valuation for a company that reaches 300M users a month, produces over $1B in revenues, and has a $1.2B war chest will look ridiculous.

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