Zynga IPO Draws Tepid Response from Investors


01/23/2012
By Debra SaundersGoogle

The initial public offering of Zynga, the popular game developer of Zynga Poker, Cityville, and Farmville, has performed surprisingly poorly.  While most IPOs manage to take advantage of the hype and push the stock price up, Zynga’s stock value went down 5%.  That said, the company still managed to bring in one billion dollars of investor money.

Even considering the current economic recession, the poor showing of a growing and profitable company is still peculiar.  Looking at other recent IPOs, such as Jive Software, Pandora, or Groupon, we see that tech stocks are still performing well despite the recession.  It would seem, therefore, that Zynga is not in that tech category.  In fact, many investors look at Zynga as an entertainment provider.  In financial terms, that means a riskier, less attractive short-term investment.  A game developer is too dependent on a flippant flock of facebook fun-seekers. 

A second reason why Zynga’s IPO didn’t perform well is their current profit model.  Most of Zynga’s revenue comes from the virtual items sold inside the games, or what is sometimes referred to as the freemium model.  Though they are currently doing well, according to their own statistics most of the profits are coming from a minority of players, and many analysts are skeptical about its longevity.  Additionally, though Zynga poker is a no deposit casino game, there is also no money to win either.  It remains unknown if facebook will ever incorporate real money online casino games.  While some casino reviews are optimistic, others remain skeptical.

Possibly the most concerning issue for investors is the uncertainty of a company reliant almost entirely on facebook.  Facebook is prone to sudden changes that can severely hamper Zynga’s ability to function or function profitably.  The high risk surely scares away potential investors. 


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