Zynga Inc. has finally put out their initial public offering, which raised $1 billion according to Bloomberg. The company sold 100 million shares at around $10 each, which is right where their S-1 filing stated they would be. Zynga will trade on the NASDAQ market as ZNGA.
The IPO puts Zynga’s value at up to $7 billion.
Zynga’s IPO comes amidst cool reception from analysts and doubts as to the viability of the company. As we reported earlier this week, analysts Sterne Agee listed the stock as “Underperform” due to declining growth and a crusting of social gaming interest. Cowen and Company analyst Doug Creutz echoed similar issues. Concerns about the company’s reliance on Facebook were broached by their own IPO. The concerns appear valid; 90% of Zynga’s revenue is from Facebook, another company looking to go public. They’ve also lost their previously unquestioned hold on the top of Facebook’s games space, with EA’s The Sims Social swapping places with Zynga’s titles routinely. They’ve also taken hits in both personnel and public relations. Crystal Steltenpohl reported about CEO Mark Pincus demanding stocks back from “underperforming” employees on pain of termination. Finally, the company has seen a rash of executives leaving the company, some of them after less than three months. There have also been accusations that the company overworks their employees by keeping them in a constant crunch culture.
Zynga’s plan for 2012 is to focus on their mobile space and to get more of their players paying. Mr. Pincus’s goal is to have 7% of their players paying money, which is over double their current rate.
Analysis: I stand by what I said in July: this is not a stock to hang your hat on. This is independent of where I stand on social/freemium gaming (hate it), Zynga (hate them), or their CEO (really hate him). What I’m looking at is a company who is riding the seriously untested medium that is freemium gaming off the backs of other people in a business where only 3% of their customers pay money; most of their games either were heavily influenced by other successful games or outright stolen. Of that 3%, only a small portion are responsible for most of the revenue. As noted in the Develop piece, Noel Llopis of Snappy Touch is claiming that 80-90% of profits from fremium games come from 0.5% of its users. In addition, competition in the space is increasing, and did I forget to mention that most social gaming is wholly and totally reliant on Facebook, who would change their rules like a schizophrenic on PCP?
The amount of uncertainty is startling with Zynga. We don’t know how they’re going to continue to draw blood from the revenue stone. We don’t know how they’re going to address the fact that they’re spreading the same amount of users among their games (they’re developing as many as ten games, according to various reports). We don’t know if the pool of social players, let alone payers, is going to increase or decrease. We also have no indications that the staff they bring in will stick around as they’ve explicitly mentioned that anyone who isn’t an executive is 100% expendable. The short tenure of some of their recent hires has to be a warning flag as their culture is burning people out.
Lastly, we have no indication that freemium gaming is here to stay. So few people are providing so much revenue. Once those players move onto the next shiny object, will this be proven to be a fad? At this point, we don’t know how much staying power social gaming has.
There’s too much negative, and too many questions, for anyone to responsibly state that Zynga is a strong company that should be invested in. And that has nothing to do with any personal biases one might have.