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Zynga's IPO: What Went Wrong?

Zynga's IPO: What Went Wrong?

December 16, 2011 | By Chris Morris

Shares in Zynga's Wall Street debut may have started strong today, but minutes after they began trading, the stock's pricing chart looked like something that even the most extreme skier would have avoided.

By the time all was said and done, the company was down 5 percent, closing at $9.50 per share (and was down as much as 10 percent at one point during the day), bucking the trend of the year's other hot internet stocks, like LinkedIn and Groupon -- despite the fact that Zynga is profitable, while those companies are not. What went wrong?

There are plenty of culprits to blame, actually. Let's run 'em down:

Analysts - Zynga hasn't won a lot of friends in the analytical community. In fact, it really hasn't found one.

Before shares even began trading, one of the gaming industry's more notable analysts -- Sterne Agee's Arvind Bhatia -- initiated coverage with a "sell" rating, citing the notable slowdown in the company's growth in recent months. Bhatia set his target price for the stock at $7.

"FarmVille, the company’s flagship title which helped generate hyper-growth in the past, has peaked and the other titles are coming on line at a much slower pace," he wrote in a note to clients. "While we believe in the potential for social games, we think Zynga's growth is slowing even faster than what is obvious at first. Its margins are under pressure, and free cash flow has been declining recently; thus we believe the implied valuation in the IPO is not justified."

While some outsiders questioned such a harsh rating before shares began trading, many in the Wall Street community said they agreed with the call.

The pile-on continued Friday with Cowen and Company's Doug Creutz giving the company a "neutral" rating, also citing a slowdown in growth and increasing expenses as well as the fact that Zynga's share of the Facebook gaming space is slowing down.

Investors - This might have been the biggest IPO the market has seen since Google's 2004 launch, but the tech world isn't real hot on internet stocks these days. There's plenty of talk about another bubble growing on Wall Street. And traders who have bet big on the year's other notable offerings haven't fared well.

Groupon, for example, might have spiked 40 percent on its opening day, but it plummeted after that, hitting a low of $15 before rebounding slightly. Pandora, meanwhile, has been essentially flat since it started trading six months ago.

Zynga might have cash, but when the company didn't exceed the high level of its range (which was from $8.50-$10), it sent a message to investors that interest had faded in the company. (It could have easily gone to $12 or issued additional shares without having to refile with the SEC.)

A silent voice - Investors like to have a say in a company when they put their money in it -- especially institutional investors. With Zynga, they really won't.

After all, founder Mark Pincus holds 70 times more voting power than all of the common stock that went up for sale today. In reality, the performance of the stock has no impact on him. If the company tanks and investors call for his head, he can ignore them. If it soars to Google or Apple territory, he profits. It's a true win-win -- unless you're an investor.

Even with the disappointing debut, Zynga is now, technically, the second biggest publisher in the industry, with a market cap that exceeds Electronic Arts and Grand Theft Auto publisher Take-Two Interactive.

But it could have been a lot bigger -- and let's hope that the folks at Rovio are taking notes about this debut as they contemplate listing in Hong Kong.

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