No Ka-Ching-A for Shares of Zynga as Stock Loses 5% on First Day; Analysis

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I talked to Chris O'Brien, business and technology columnist for the San Jose Mercury News, about today's Zynga IPO dud:

This really ends the year on a sour note for the tech IPO market. It's a momentum killer. Heading into next year, all eyes will be on Facebook. But it's not clear there are any other potential IPOs big enough to restore that momentum.

There was an expectation that because Zynga had lowered its offering range and they were offering a limited amount of stock there would be enough pent-up demand among investors that it would get driven up pretty high on the first day as is typical of this kind of offering.

I think there are two things at work here; first off their updated filings with their results the last couple of quarters have not been spectacular. They've been good with increased revenue but it seems like their growth has slowed a bit.

Second, there's some question about their model going forward. there's been some flatness in the number of users playing their games, even dropping a little bit. They had started to talk about their business in terms of what they call the movie studio model, depending on them producing the next hit as it were. Certainly that's doable, but the movie business is not the most dependable, robust business in the world. There's a lot of uncertainty as to how products will perform. So that may have made investors a bit nervous.

The last bit of it may have been a bit of fatigue with the number of offerings we've seen from the social media space. It's worth noting on the whole that the sector has not performed well. A lot of us assumed in some ways that investors would continue to defy logic and bid up the prices on the first day. But if you look at the way the IPOs have performed, the vast majority are under their offering price for the year.

If you want to turn the Zynga performance on its head, you could argue that investors showed a rare bit of logic rather than emotion.

Update 1:30 p.m.: Shares of San Francisco-based online game company Zynga closed their first day of trading at $9.50, down from their opening price of $10.

This is a far cry from the heady first trading days of two other local tech companies that went public this year, LinkedIn and Pandora. Investors bid up Pandora shares 9 percent on their first trading day in June and more than doubled LinkedIn's opening stock price in May.

Of course, an opening day does not a season make. Pandora stock is now down nearly 35 percent from its IPO price, and LinkedIn shares have taken a 20 percent haircut off their opening.

In any event, a one possible narrative emerging in terms of tech stocks is found in this Reuters headline:


"Zynga falters in debut, sheds doubt on IPO market."

The joy in Farmville today must be a little muted...

Original post

NEW YORK (AP) -- Investors will get the chance to reap "Farmville's" harvest on Friday, as shares of online game developer Zynga Inc. start trading on the Nasdaq Stock Market.

The San Francisco company, which specializes in Facebook games, priced its initial public offering late Thursday at $10 per share, raising $1 billion. That makes it the largest Internet-related IPO since Google Inc. went public in 2004, raising $1.4 billion.

The price was at the top of its expected range, a sign that investors are eager to dig into the latest in a series of high-profile technology IPOs this year. It values the company at about $7 billion.

Zynga charges small amounts of money — a few cents, sometimes a couple of dollars — for virtual items in online games. The games are free to play. Players can aquire items that range from crops in "Farmville" to buildings in "CityVille," its most popular Facebook game.

With its huge player base and a few loyal spenders, Zynga earned a net income of $90.6 million in 2010, an unusual pre-IPO money maker in the sector.

Cowen & Co. analyst Doug Creutz, however, initiated coverage Friday with a "Neutral" rating on the stock. While Zynga is the leader in Facebook gaming, he's concerned that it won't be able to grow fast enough to justify its stock price. Growth in Facebook gaming has slowed, and Zynga's market share has declined from 50 percent to 38 percent of daily active users, he wrote.

He's also concerned that Zynga's famously aggressive and hard-charging culture may not be the best field to grow good games in. Others have raised concerns that the focus on deadlines and profits might be squeezing out creativity and talent.

In November, online coupon company Groupon Inc. raised $700 million in its IPO. The granddaddy of all Internet IPOs might happen next year, as Facebook Inc. is expected to raise as much as $10 billion.

Zyna will trade under the ticker "ZNGA" on Friday.