Zynga-OMGPOP deal draws mixed views from Wall Street analysts

Zynga’s purchase of OMGPOP for a price reported to be around $150 million to $200 million has drawn mixed reviews on Wall Street. The deal gives Zynga the team that made Draw Something, a Pictionary-style mobile game that has been a phenomenal success over the past six weeks.

Zynga’s bear, Sterne Agee analyst Arvind Bhatia, wrote in a report, “If the media speculation of the acquisition price ($150M-$250M) is anywhere close to being accurate, the deal may look expensive. Recall, Zynga previously acquired Words with Friends creator Newtoy for $53M in late 2010. Reiterating Underperform; $7 target.”

[aditude-amp id="flyingcarpet" targeting='{"env":"staging","page_type":"article","post_id":406833,"post_type":"story","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"entrepreneur,games,mobile,social,","session":"A"}']

Investors evidently disagree, as Zynga’s stock price is up 1.68 percent today, at $13.95 a share. That values Zynga at $9.76 billion. OMGPOP was valuable in Zynga’s eyes because Draw Something has been downloaded more than 35 million times since its launch.

Atul Bagga, an analyst for Lazard Capital, was more bullish. He said in his report that he estimates Draw Something is generating about $200,000 to $250,000 in revenues a day. At that rate, then the $200 million valuation would be about three times the current revenue run rate.

“We believe that he acquisition makes a lot of sense for Zynga,” Bagga wrote. “With more than 13.3 million daily active uses (versus 15 million DAU for all of Zynga’s mobile games), Draw Something could help Zynga meaningfully grow its footprint in the mobile space.”

Bagga said that mobile games are the fastest-growing segment of the video game market with a 39 percent compound annual growth rate over the next five years. A larger footprint in mobile will help Zynga cross promote its mobile games. Bagga expects Zynga to continue to be aggressive in mobile with internal launches and acquisitions. He has a $16 price target for Zynga’s stock.

Michael Pachter, an analyst at Wedbush Securities, is an even bigger bull. He has a 12-month price target on Zynga of $17. He said that the deal would give Zynga a better mobile presence and the company is well-positioned for long-term growth.

Zynga has not yet confirmed the purchase price of the deal. But Ben Schacter, an analyst for Macquarie Capital, said that he believes a bidding war for OMGPOP led to “too high of a price.”

“We remain concerned that Zynga is a single-platform company and is much less dominant on its own platforms,” he wrote. He thinks Zynga will be challenged to continually establish hits. And he raised the question of whether the new Angry Birds Space game will siphon away mobile users from Zynga and OMGPOP.

He has a neutral rating on the stock and a $10 price target.

[aditude-amp id="medium1" targeting='{"env":"staging","page_type":"article","post_id":406833,"post_type":"story","post_chan":"none","tags":null,"ai":false,"category":"none","all_categories":"entrepreneur,games,mobile,social,","session":"A"}']

Bhatia has been a bear on Zynga since before its IPO. While sinking at first, Zynga’s stock began rising this year as a result of speculation that its Poker and casino games could benefit from a legalization of online gambling in the U.S.

“While this may be a coincidence, it is interesting that Words with Friends seems to have seen a bit of decline in recent weeks following the launch of Draw Something. In fact, Words with Friends recently lost its position as the top App on iPhone to Draw Something. Another article has speculated that Draw Something has been generating on average $250K in daily revenue in recent days,” Bhatia wrote. “We suspect that most of this revenue, at least currently, is being generated from the one-time purchase of the paid version of the App. In other words, it would be incorrect, in our opinion, to assume the $250K daily revenue run rate (if that’s accurate) is sustainable.”