Social gaming company Zynga had the on- and off-line worlds all a-flutter mid-December ’11 after raising a cool $1 billion, boosting its market valuation to $7 billion-plus in the process.
But when shares closed the first day at a disappointing $9.50 apiece, with a market valuation circa $2.5 billion, folks were quick to call the IPO a flop.
Silicon Valley speculators have even pointed the finger at Zynga for putting the kybosh on future start-ups going public. The San Jose Mercury News reported: “With buzzed-about social media companies having failed so far to make a lasting impression on Wall Street, the bar for going public is likely to remain high.”
“That could dampen the wealth-generating effect a raft of initial public offerings can have on Bay Area employment, housing prices and luxury auto dealerships.”
Fewer luxury auto dealerships? It’s a wonder that Zynga can sleep at night.
Farmville – as synonymous with Facebook layouts as the ‘Like’ feature, throwing virtual barnyard animals, and LOLing all over your mates’ walls – is the brainchild of Zynga. Yet even with an impressive pedigree of smash-hit social games, the company had its fair share of doubters before it floated.
According to Morningstar analyst Rick Summer, Zynga’s dependence on Facebook, plus the fact the bulk of its revenues come from 1.5 per cent of its users, means it’s far from a safe bet.
In a report released prior to the IPO, Summer wrote: “We recommend long-term investors to pass on this IPO as valuation appears stretched at $10 and above – our fair value estimate is $6.00.”
“We don’t believe the company exhibits an economic moat given our concerns regarding lifetimes of both Zynga game titles and their uses.”
“Further, we question Zynga’s ability to sustain bookings growth, particularly as competition intensifies and as gamers increasingly engage with smartphones and tablets, where the firm has been less successful.”
Regardless of the future of Zynga, it’s not all doom and gloom for social media IPOs. In 2011 alone, at least three tech companies that went public are performing strongly.
LinkedIn, which floated at $45, is currently worth a cool $63.85 per share. A more subdued Groupon – which has endured a bumpy ride to date – is being peddled for $22.84; it opened at $20.00. Meanwhile, Zillow also went public at $20.00, and currently trades for $22.82.