Zynga Inc (NASDAQ:ZNGA) launched the sequel to its most popular game yesterday, FarmVille 2. The sequel is a total makeover for the simplistic, addictive, but oft-derided online diversion, with lush 3D graphics instead of the old two-dimensional figures.
Whether or not the sequel will command the same success as the earlier version is something still to be seen. For public online gaming companies, it is relatively easier to start from scratch as compared to grow when existing games are on a decline. There is always a possibility that the sequels, unlike the expectations of the maker, accelerate the decline in existing games. Such a scenario comes at a double cost, as now two games have to be operated and run, whereas there was only one earlier. What is even worse, is the sequel failing to make a mark, as was the case with Mafia 2. Some similar kind of scenario could be mimicked for Farm Ville 2, says a report from Pacific Crest.
Despite all these issues, Zynga Inc (NASDAQ:ZNGA) had no other option, except to go for the sequel to extend the life of the franchise, because its biggest contributor to the revenue, FarmVille 1, is clearly approaching the end of its useful life. The report says “it is disappointing that FarmVille 2 has to be launched in the first place. The promise of online games is that developers can continue to improve games over time to better-retain users and continue make the game increasingly attractive to new players.”
The report says, the current valuation of Zynga Inc (NASDAQ:ZNGA) is correct and is similar to other gaming companies, which are generally revalued after coming up with a new hit IP. The report also expressed concerns over “Zynga spending its cash on acquisitions and lowering the valuation floor.”
Though the launch of FarmVille 2 was the right move from the company, it might intensify Zynga’s near term growth issues.
Pacific Crest sums up Zynga’s farmVille 2 with the following conclusion:
We think that Zynga Inc.’s initial valuation has been formulated using a flawed comparison group and, therefore, represents unrealistic assumptions about industry revenue growth, market share and margins. Our negative thesis has little to do with our view of the ongoing uptake of free-to-play or mobile games, or, as Zynga puts it, “the macro of gaming.” Instead, we believe that Zynga is faced with many of the same risks the traditional game businesses face, but with a valuation that is more expensive. While Zynga’s valuation is much cheaper than it has been, we still would like to see it improve its ability to release hits.