John Riccitiello, Electronic Arts CEO has caused the shares of Zynga Inc to drop to their lowest level earlier this week after he suggested that Zynga paid too much for a recent takeover deal. This caused analysts to ponder the decision.
Riccitiello was holding a fourth quarter earnings call on Monday which suggested that acquisitions in the social game sector were now too expensive. He didn’t mention Zynga by name, although the analysts were able to read between the lines.
Zynga are the creators of popular Facebook games such as FarmVille and Mafia Wars and they recently paid $180 million to buy OMGPop, who make the very popular mobile game ‘Draw Something’ which managed to knock Angry Birds from the top spot for a while on the App Store.
Riccitiello said on the conference call “Right now, what I’m starting to see is valuation expectations that assume that these things are all hockey sticks moving up and to the right with no end in sight. I think those are bad assumptions.”
The popularity of Draw Something however has declined since April, which reinforced the comments that Riccitiello was making. Zynga’s daily active user base has also declined by a significant 12.5 percent in April.
Zynga share their revenue stream with Facebook when people make purchases playing Zynga games. It is trying hard to generate more revenue from sales on Zynga.com as it doesn’t have to share a percentage of the sale with Facebook.
ABCNews added “Riccitiello said valuing social game companies at 10 or 20 times adjusted earnings requires a belief the growth will last a “very, very long time.” Instead, he said he said one should add up a company’s expected profits over three or four years, expecting that they will rise and then fall, and to discount that value to account for risks.”
Kitguru says: Is the EA boss right?