When I mention Zynga to friends outside of the tech world, they look at me cross-eyed. Then I say "It's the company that makes FarmVille, you know..." I usually get a disgusted look back. Of course, Zynga also makes other games, like CityVille, CastleVille and Mafia Wars. Oh, and Words With Friends, the Zynga game that most folks seem to have no qualms about playing. The game has jumped from two million players to 10 million in just one year.
Zynga is poised to launch tomorrow with the biggest tech IPO since Google. Revenue-wise, it is in the clear; on September 30, 2011, at the end of the third quarter Zynga had a gross revenue of $828,863 and a net income of $30,689. The number of paid players using Zynga accounts for only 3% of the userbase, or 227 million monthly users.
Yet Sterne Agee analyst Arvind Bhatia believes Zynga's IPO will underperform. A report released yesterday by Sterne Agee said that instead of $8.50-$10 per share, $7 would be a stronger target price. "While we believe in the potential for social games, we think Zynga's growth is slowing even faster than what is obvious at first," Bhatia writes. It also argues that Zynga is overly dependent on the Facebook platform, which accounts for 94% of its revenue. Plus, the report claims, Zynga's most popular games, FarmVille and CityVille, have already peaked.
TechInsider a.k.a. Rob, a former Intel analyst and current StockTwits blogger, told us he was initially quite bullish about the Zynga IPO, but changed his tune following the Groupon IPO. "$7B is too pricy for Zynga's high-risk business model + dependence on FB," he wrote via Twitter. "Zynga is more attractive at $5B." Like Agee, he points out Zynga's over-dependence on Facebook.
On the day Groupon launched its IPO, Rentech Nitrogen Partners L.P., a nitrogen fertilizer company, also went public at $20 per share.
The two most-watched IPOs that are slated for tomorrow are Zynga and Michael Kors, a mid-range designer that's less expensive than Coach. It's expected to price at $17-$19 per share with a $3.7B valuation. InvestingDaily.com writes "both stocks are expected to skyrocket out of the gate but only one is quality." Hint: It's name doesn't start with "Z." Barron's reports that the Zynga IPO could price even higher than its $8.50-$10 valuation all the way up to $12 per share.
Image via igeekpurses.co.