Zynga’s IPO: What Went Wrong?
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?
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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.
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