NEW YORK (AP) — As its workers celebrated with hot
chocolate and cinnamon buns, Zynga saw its stock dinged on its first day
of trading Friday — an unexpected turn of events for a closely watched
public debut seen as a precursor to Facebook’s next year.
Zynga
Inc., the online game developer behind "FarmVille," ”Mafia Wars" and
other popular time killers on Facebook, raised at least $1 billion in
its initial public offering of stock, the largest for a U.S. Internet
company since Google’s $1.4 billion IPO in 2004.
But by Friday
afternoon, Zynga’s stock fell 50 cents, or 5 percent, to close at $9.50.
The stock priced at $10 on Thursday, at the high end of its expected
range. It traded as high as $11.50 on Friday before heading into a
downward spiral on the Nasdaq Stock Market.
It was far from the
eye-popping jump that has been the trend this year for freshly public
Internet darlings such as LinkedIn Corp., which saw its stock double on
its first trading day.
Zynga’s opening — with a ticker symbol of
"ZNGA" — was supposed to be big. After all, unlike many others with
IPOs, the company is profitable, with more than 220 million people
playing its games on Facebook each month.
What this all means for Facebook’s IPO, expected sometime after April, is hard to say. One thing is
clear, though.
"A hot IPO is not guaranteed," said Kathleen Smith, principal of IPO investment advisory firm
Renaissance Capital.
Despite
the big-name public offerings this year, the IPO market is not in good
health. Buyers are skittish and concerned about the high volatility of
freshly public stocks, Smith said. Big name or not, investors don’t want
to pay sky-high prices for stocks, especially not before a company has
proven itself with good earnings reports and analyst ratings.
Seventy
percent of the 125 companies that went public this year are now trading
below their IPO price, according to Renaissance Capital.
While
Friday’s drop doesn’t look good, it’s not devastating for Zynga. Its
CEO, Mark Pincus, said the company’s focus is on "delivering great
products" that expand audience for social games over the next few years —
and not on the next trading day.
"We didn’t have any expectations
coming into this whole process," he said in an interview. "We decided
to go public a long time ago."
Pincus rang the Nasdaq’s opening
bell in San Francisco, a first in the city for a freshly public company.
The company’s roughly 1,700 San Francisco employees woke up at the
crack of down to celebrate with cinnamon buns and hot cocoa. Zynga also
delivered video of the opening ceremony over the Internet to its offices
around the world.
Thursday’s pricing gives Zynga a market value
of about $7 billion. That’s roughly half of the value of online deals
site Groupon, which began trading in early November. Zynga, though, sold
a much bigger chunk of its available shares, 14.3 percent compared with
Groupon’s 5.5 percent. It’s an issue of supply and demand — selling
more shares means investors don’t have to scramble to get their hands on
them.
Wedbush analyst Michael Pachter said stocks trade based on supply and demand on the first day.
In
Zynga’s case, he believes the IPO’s underwriters placed more shares
with investors who were going to "flip" the stock — that is, buy a hot
stock and quickly sell it to make a profit instead of holding on to it
for the long run. All that selling tempered the stock’s price, and other
nervous investors started selling, too.
Sterne Agee’s Arvind Bhatia said the issue came down to valuation — what people are willing to pay.
"You
might like a company but not its valuation," said Bhatia, who took the
unusual step of starting coverage of Zynga’s stock before it went
public, giving it an "Underperform" rating and a price target of $7.
With
its huge player base and a few loyal spenders, Zynga had net income of
$90.6 million in 2010, an unusual pre-IPO money-maker in the sector.
Cowen
& Co. analyst Doug Creutz, however, initiated coverage Friday with a
"Neutral" rating on the stock. Although Zynga is the leader in Facebook
gaming, he’s concerned that it won’t be able to grow fast enough to
justify its stock price. Growth in Facebook gaming has slowed, and
Zynga’s market share has declined from 50 percent to 38 percent of daily
active users, he wrote.
He’s also concerned that Zynga’s famously
aggressive and hard-charging culture may not be the best field to grow
good games in. Others have raised concerns that the focus on deadlines
and profits might be squeezing out creativity and talent.
In
November, Groupon raised $700 million in its IPO. The granddaddy of all
Internet IPOs might happen next year, as Facebook Inc. is expected to
raise as much as $10 billion.
Bhatia declined to speculate about
what Zynga’s first-day drop might mean for Facebook. But he pointed out
that what was a bad year for Zynga was a good year for Facebook. That’s
because Facebook stated charging application developers a 30 percent cut
of the money they make through its site. That means for every dollar a
player spends on "FarmVille" crops, 30 cents goes to Facebook.
"They are in the driver’s seat," Bhatia said of Facebook. The company, he added, is "in
class of its own."
DreamWorks CEO Jeffrey Katzenberg, who sits on Zynga’s board, said Zynga and Facebook have both benefited
by working together.
"As
important as Facebook is to Zynga, Zynga is to Facebook," he said in an
interview. "I have seen very good rapport with the two Marks and I
would expect that relationship to continue to grow."
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AP Technology Writer Peter Svensson contributed to this report.
Copyright 2011 The Associated Press.