Sterne Agee Lists Zynga Stock as "Underperform"

ZyngaEarlier this month, Gaming Bus reported that Zynga’s Shares for their planned IPO status would only be valued at $8.50 to $10 a share, amounting to around $7 to $9 billion in net worth. Gamasutra now reports that analyst group Sterne Agee has just listed their coverage as “Underperform” days before trading is slated to begin on December 16.

Arvind Bhatia, Director of Research at Sterne Agee, gave this explanation for the coverage:

“We are initiating coverage with an Underperform rating. 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.”

The foundation for this conclusion, they cite, was how many of their social games have reached their peak with concurrent players. Zynga also derives approximately 94% of their profits from Facebook, and any policy change at Facebook could be a major disruption that could harm Zyngas profits substantially. They also see that Zynga will move forward at a much slower growth rate, 20% in 2012 and 17% in 2013. One of Zynga’s highest growth periods was back in 2010 at 156%. Then in 2011, it slowed dramatically to 37%.

Analysis: The talk here at Gaming Bus has always been cautiously optimistic in regards to Zynga’s future, to say the least. This is a very rough time for Zynga, given their many speed bumps in the past few months. After what I’ve seen these past few months, I have to agree with this analysis. I’m not exactly anti-Zynga, but they’re too dependent on Facebook; and in my opinion, using cheap tactics to get people to pay for in-game items is low, and sooner or later people will catch on.

At this point I think many people have, which is why they have seen substantial drop in their growth. The winds of change are here for Zynga, but it isn’t too late for them to change their direction and become a better company. Only time will tell if they run aground or sail into the horizon. At this point, I won’t board that ship until there’s a more definitive direction for their future.


About Brandon Mietzner