Jim Wilson/The New York TimesMark Pincus, Zynga’s founder and chief executive.8:56 p.m. | Updated
The virtual cow is the new cash cow of Wall Street.
On Thursday, Zynga, the creator of social online games involving farms, poker tables and kingdoms, priced its initial public offering at $10 a share, at the top end of its expected range. The offering, which raised $1 billion, values the company at $7 billion.
The highly anticipated public offering — the largest for an American Internet company since Google — is a critical milestone for the social gaming industry, solidifying the legitimacy of a business model once mocked by investors. At $7 billion, Zynga rivals traditional gaming companies like Electronic Arts, which makes a lot of its money at brick-and-mortar stores.
“This is a revolution,” said Lou Kerner, an analyst at Liquidnet, a brokerage firm, who has followed Zynga for years. “Social is revolutionizing the gaming industry and it’s really the early days of a brand new medium.”
Founded in 2007, Zynga has emerged as the shining example of Gaming 2.0.
Zynga attracts 222 million people each month on Facebook, making it the largest gaming company on the social network. A small fraction of users, less than 2 percent, pay money to populate their farms or build their cities in games like FarmVille and CityVille.
But the virtual goods are generating real profits. Each day, players spend $3 million in Zynga’s economy. In the first nine months of the year, the company had earnings of $30.7 million, on revenue of $828.9 million.
While estimates once put Zynga’s market value at nearly $20 billion, new investors are nonetheless paying a premium for the company. At $7 billion, it is set to start trading at seven times sales. By comparison, Electronic Arts, which makes the popular Madden N.F.L. video game series, has a market value of $6.9 billion, putting its price at roughly two times sales. Including unexercised options and warrants, the offering values Zynga at $8.9 billion, according to its prospectus.
Investors are betting on the potential for profits.
Zynga embodies a confluence of trends in the gaming industry. Its whimsical games cater to casual users, who may not own a console like a PlayStation 3. Its games, which are available on Facebook and mobile devices, also use social networks to allow players to share activity with their friends.
Led by the hard-charging Mark Pincus, a graduate of the Harvard Business School who spent his formative years on Wall Street, Zynga is often denounced by critics for its intense culture and for emulating rivals’ games. But many also credit Mr. Pincus as a pioneer for making a big bet on social gaming and the so-called freemium model, in which playing is free but players have the option to upgrade features by spending money.
“Say what you will about Zynga. But Mark knew that free was the next big thing, and he went harder than anyone else,” said Gabriel Leydon, the founder of Addmired, another gaming start-up. “He saw the trend way ahead of time, and he spent the most money.”
It took time to persuade Silicon Valley of the model’s potential. Mr. Pincus is a serial entrepreneur who founded Freeloader, an Internet broadcast service sold for $38 million in 1995, and Support.com, an online consumer support service that went public during the last dot-com boom. He initially got snubbed by many venture capital firms, according to people with knowledge of the matter who would speak only anonymously because the talks were private. His first major fund-raising effort for Zynga mainly attracted wealthy friends, like Peter Thiel, a founder of PayPal.
As Facebook grew rapidly, so did Zynga, and it soon attracted the attention of Silicon Valley’s top venture firms. Kleiner Perkins Caufield & Byers has an 11 percent stake and companies led by Yuri Milner, a Russian billionaire, hold a 5.8 percent stake. Google, which invested in Zynga in 2009, owns 4.1 percent.
Zynga’s insiders are largely remaining steadfast. Mr. Pincus is holding on to his shares. And the main venture capital firms will reduce their holdings only if demand is strong and bankers decide to sell more stock. In that case, Institutional Venture Partners, Union Square Ventures, Foundry Venture Capital and Avalon Ventures will each sell a little more than two million shares.
The company is going public at a volatile time for the initial public offerings. The market has been shaken by continuing credit fears and skepticism that the new darlings of technology can sustain their momentum. Groupon, the daily deal site that went public in early November, tumbled as low as $14.85 a share, well below its offering price, before bouncing back recently. In another ominous sign, Zynga’s Asian rival, Nexon, raised $1.2 billion in its offering on Wednesday, but it stumbled 2 percent on its first day of trading.
Zynga’s long-term outlook is also mixed. Despite its popularity, it has struggled to find new catalysts to increase user adoption.
Then there is the Facebook issue. Analysts are concerned that Zynga, which derives nearly all its revenue from the social network, will not be successful at building out its independent platforms, particularly for mobile devices.
Zynga has been an aggressive acquirer but has failed to persuade some mobile gaming companies to join its ranks. For instance, both PopCap and Rovio, the maker of Angry Birds, turned it down this year despite billion-dollar offers, according to people with knowledge of the matter. As social gaming evolves, many analysts say they believe that mobile is a must-win area.
“Mark Pincus was one of the first who really saw the opportunity of virtual goods,” said Mr. Kerner. “But it’s not just about Facebook anymore, they have to figure out mobile, too.”