MONEY AND IT BUSINESS: Zynga IPO pops 10% - then sinks

December 16, 2011

NEW YORK, United States.- Turns out there's billions to be made from FarmVille cows and crops.

Shares of online gaming giant Zynga (ZNGA) opened at $11, 10% above their initial offering price in the public debut of the stock on Friday.

Zynga had priced its initial public offering at $10 a share late Thursday. Under the ticker ZNGA, Zynga began trading Friday at about 11 a.m. ET on the Nasdaq stock exchange. It soared as high as $11.50 before falling back, dropping to $9.52 in its first 15 minutes of trading.

Zynga's IPO valued the company at around $7 billion. While that's an impressive market cap, Zynga's share price is still significantly below the $17.20 per share valuation the company used for a recent round of stock grants. As of August 2011, Zynga's outside consultants estimated the company's worth at $14 billion.

Still, the IPO was successful in raising $ 1 billion for Zynga, which directly sold 100 million shares in its IPO to raise $1 billion. That edges out Groupon and makes Zynga's the largest U.S. Internet IPO since Google's (GOOG, Fortune 500) 2004 debut.

Zynga is entering the market at a turbulent time for this year's batch of tech IPOs. Shares of Groupon (GRPN), Pandora (P), Zillow (Z), LinkedIn (LNKD) and Angie's List (ANGI) all suffered steep double-digit losses for November, though most have clawed back a bit in December.

But Zynga's financials are stronger than many of its newly public counterparts, and the company has multiple revenue streams.

In 2010, the company had a $90.6 million profit on sales of $597 million. For the first nine months of 2011, it netted $30.7 million in profit on almost $829 million in sales.
Zynga gets revenue from its users paying real money for virtual goods, like tractors and animals for their online farms. Zynga noted in its filing that it relies on this "small portion of our total players for nearly all of our revenue," but it didn't break that figure out separately. The company did reveal that users create and store more than 30,000 virtual goods every second.

Zynga's other revenue stream is unique advertising, such as Starbucks (SBUX, Fortune 500) paying to have a virtual coffee shop in CityVille. Users might have to visit that virtual store 10 times in order to build a Starbucks franchise in their own virtual cities.

But the casual gaming space is heating up, and Zynga faces competition from big names including Electronic Arts (ERTS) and Disney-owned (DIS, Fortune 500) Playdom. It's feeling the crunch: Zynga's number of daily active users declined 10%, to 54 million, in the five months since the company first filed its IPO paperwork.

The Facebook effect: In its IPO filings Zynga called Facebook its "primary distribution, marketing, promotion and payment platform," noting that any change in terms could harm business.

Zynga learned that the hard way. In its early days, the company resorted to spammy and scammy tactics to gain new -Ville gamers and monetize existing ones.

Facebook users became so frustrated with Zynga notifications clogging up members' newsfeeds and dashboards that Facebook decided to expressly prohibit the practice in early 2010.

Zynga straightened up after the crackdown, and it has a contract with Facebook in place through 2015 governing its service terms. The deal requires Zynga to use Facebook's own currency, Facebook Credits, as its primary payment system. Facebook keeps 30% of the revenue from those payments, and passes the remaining 70% on to Zynga.