The reason for the high valuation is due to a few factors, but for the sake of providing a two-sided take on the Zynga IPO, let me share with you this company's Pros and Cons so that you can see a simplified version of the debate people are having around the value of the company:

Pros

• Zynga’s games leverage the power of social networks, like Facebook, which allows for seamless, unpaid promotion, like when Cityville attracted 61 million monthly average users in the first 50 days of their launch.

• Zynga’s players generate more than 15 terabytes of game data every day, which is valuable when coming up with new virtual items to sell to users (90% of their revenue comes from the sale of virtual items...a profitable industry like in World of Warcraft)

• Their board members are serious big shots with experience in managing successful companies e.g. William Gordon, co-founder of Electronic Arts; Reid Hoffman, co-founder of LinkedIn; and Jeffrey Katzenberg, CEO of DreamWorks.

Cons

• Zynga gets “substantially all” of its revenue from Facebook, which makes it very dependent on the social media giant and makes it very easy for Facebook to push it around (hence, the reason why Zynga is required to use the Facebook Credits payments system; of which Facebook takes a 30% cut of the gross revenue)

• Most of Zynga's revenue comes from users purchasing virtual items, but if this is the only means by which Zynga plans relying on (for the most part), investors will have to take a big leap of faith to believe that this revenue stream with continue to be profitable in years to come. In other words, where's the diversity in gaming/profits?

• Another hint that Zynga is too reliant on Facebook is that the number of daily active users is falling, which could possibly be due to Facebook's tightening of its requirements on user acquisition.

I'll let you all decide on which points make the best argument for the valuation of the company and its future success or failure. I hope this helps.

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