Yesterday, Zynga released their financial statmeents for the second quarter. Analysts expected Zynga to bring in a total of $344.12 million in revenue, but instead Zynga underperformed. While their actual revenue of $332.49 million was within the deviation ($313.87 million and $361.61 million, low and high respectively), they still failed to pull in a profit, and this left investors unsatisfied. The result was a huge 38.56% after hours crash in stock price, leaving their current share price at a meager $3.12 per share—less than a third of their original $10/share IPO.
Zynga’s revenues were up 19% year-over-year, but their heavy losses in Q4 had already made investors paranoid about the company. Since then, they have been inching towards pulling a profit once again, but this massive blow to their stock prices may hinder that. The drop was large enough that Facebook felt a ripple effect, enough to drop their own stock prices by 7.63%. Zynga and Facebook are meticulously tied together, as Zynga had claimed previously that 92% of its revenue had been generated on Facebook during the first quarter. While Zynga is much more dependent on Facebook than vice versa, Facebook still gains a relatively large amount of revenue from the game company, as is apparent by their fall in share price.
Zynga’s earnings have also not been aided by the fact that founder Mark Pincus has sucked over $300 million out of the company by selling close to 8 million shares back at $14/share in March of last year and then approximately another 1.6 million shares at $11.64/share this past April. Zynga has since reduced their projected yearly earnings/share from 23¢-29¢/share to 4¢-9¢/share.
Analysis: This article was written before the market reopened, but in all likelihood, this will halt trading on Zynga’s stock for at least the third time. Last month, this happened twice. Their share price has been dwindling further and further from their IPO. While their Market Cap is still very high ($3.74 billion), investors are scared to death that Zynga is going to crash into the ground and burn. An IPO is always a risky thing; very few new stocks take off and do well, especially if they’re web-related. I have no doubt the investors in Zynga are the very same who still have flashbacks from the Dot-com bubble.
However, this is the very thinking that will cause an IPO to burn far before its time. While I do think Zynga was far overvalued and too young to have such a strong IPO, I don’t feel social free-to-play casual games are going to die out as a fad. They’re fun and generate money, but Zynga opened their IPO at the height of their popularity. New things are often very popular, but they drop in popularity a bit until they stabilize and become over all profitable. I think this is what’s causing Zynga to perform poorer than expected. However, I don’t believe they’ll fail as a company unless that’s directly caused by the investors.