Bucking the trend of major first day pops in share price, Zynga (ZNGA) jumped only 10 percent in early trading before falling under its IPO price. The company offered 100 million share in its IPO at $10 a share, valuing the company at approximately $7 billion.
What, No Pop?
The rise and fall of tech IPOs had started to become fairly predictable and big first-day gains had been met by declines over the next month for the year. Birinyi analyst Kevin Pleines pointed out that tech IPOs have jumped an average of 31 percent from their IPO price on first-day trading while 18 of the 30 stocks he considered have since fallen below their IPO price. In addition, 24 of 30 have dropped below their opening day price. It's possible that this recent history, most recently illustrated during the Groupon (GRPN) IPO in early November, led investors to take a more measured approach to Zynga's offering.
It's also possible that serious questions about Zynga's ability to maintain growth remain. Analyst Arvind Bhatia of Sterne Agee had already given Zynga an Underperform rating and a price target of $7 on Wednesday, two days before its IPO, citing slowing growth. Cowen & Co. analyst Doug Creutz initiated coverage on Friday with Neutral rating, pointing out that growth in Facebook gaming has slowed and Zynga's market share has declined from 50 percent to 38 percent of daily active users.
Biggest IPO Since Google
Despite the lack of a spike in share price, Zynga still managed to raise $1 billion, making it the biggest internet-related IPO since Google raised $1.9 billion during its 2004 IPO. Zynga got there, in part, by offering a much larger portion of its shares to the public. While Groupon only served up 5.5 percent of shares in its IPO, Zynga was selling a 14.3 percent stake in the company. The IPO price means that the company is valued at just under $7 billion, putting it ahead of competitor Electronic Arts (ERTS), which has a market cap of $6.7 billion. Zynga's long-term prospects are seriously changing, and most analysts believe that the money from the IPO will be spent on diversifying its revenue streams.
Zynga currently depends on Facebook for over 93 percent of its business, a model hindered by the fact that Facebook takes a 30-percent slice of their revenue off the top. Add to this increased competition coming from EA, which purchased PopCap Games earlier this year to improve its online presence, and Japanese maker of Facebook games NEXON Co (3659.TYO), which had its own $1.2 billion IPO in Japan earlier this year. However, the influx of $1 billion in cash is expected to give Zynga capital to invest in both new games and seeking out sources of revenue outside of Facebook. The company announced plans to create a website called Project Z that would be a stand alone Zynga website and give it a chance to market games directly to consumers without have to pay Facebook their cut of revenues.