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Summary:

Zynga’s IPO Friday has garnered lots of buzz, as its day-one stock market performance has been much more lackluster than many expected. But there are several important events on the near-term horizon could be even more telling about how investors value the social gaming business.

Zynga executives and investors ringing the NASDAQ opening bell

Zynga executives and investors ringing the NASDAQ opening bell

Zynga held its initial public offering on Friday, raising $1 billion in a stock market debut that valued the company at some $8 billion at the height of the day’s trading. However, Zynga’s stock did not have the day one share price “pop” seen by some other recent web IPOs such as LinkedIn and Groupon: The stock closed Friday afternoon at $9.50 per share, a pretty significant drop from its IPO price of $10. Predictably, that’s left the door open for speculation about what this means for the viability of Zynga itself and the tech IPO market in general.

But it’s important to remember that IPO day is literally just the beginning for Zynga’s new life as a publicly traded company. Now that its ownership is shared by a much larger group of investors, Zynga will be subjected to closer scrutiny than ever before: The judgement does not stop here. There are several important events on the near-term horizon that pertain to Zynga, and checking in on the share price at those times could be even more telling as to how investors value the social gaming business.

The way I see it, the potential events to look out for are:

  • When Facebook goes public
    This is a biggie. Facebook is said to be preparing to hold an IPO in the spring of 2012, and Zynga’s business as it stands today is hugely dependent on the social networking giant. In fact, Zynga’s S-1 filing to the SEC minced no words in outlining the risks inherent in the closeness of this relationship. If Facebook’s IPO performs strongly, that could be great for Zynga — but if it’s lackluster, Zynga may well feel the crunch. Or Facebook’s IPO could do well and Zynga’s stock price could suffer. (The stock market is an unpredictable thing.) Either way, Facebook’s IPO day will almost certainly have an effect on Zynga’s market valuation.
  • When Zynga declares real independence from Facebook
    For all of Zynga’s reliance on Facebook today, the company is working hard to become more successful as a standalone gaming destination. Zynga made a major step towards independence in October when it unveiled “Zynga Direct,” which CEO Mark Pincus said is an over-arching strategy for the company to establish a direct relationship with its users. The first part of Zynga Direct is an upcoming social games platform, codenamed internally Project Z, a web platform in which users will be able to play any Zynga game within the same environment on any browser — rather than within Facebook.

    It’s a delicate balance, but it may just be a matter of time before Zynga makes more concrete steps toward autonomy, such as only releasing the lower-budget older versions of games on Facebook so users who want to play the newer ones have to go to Zynga directly. Independence for Zynga will mean it gets to keep a lot more money — Facebook charges a 30 percent commission on all third-party app revenue. And of course, more money is something investors usually like very much.

  • On May 29, 2012
    Every company that goes public is subject to a “lock-up period” that typically lasts up to six months after an IPO. During this time, the company’s employees, early investors and founders are not allowed to sell shares of stock they hold in the company. The day a lock-up period ends, a significant amount of new shares can enter the market if those insiders decide to cash out. If demand doesn’t keep up with that boost in supply, share prices can take a hit: LinkedIn’s stock dipped a full seven percent when its lock-up period ended last month.

    Zynga’s lock-up period is 165 days long, ending on May 29, 2012.

  • If regulators crack down on Zynga
    Now, this is a big “if.” But there are some people who are concerned about the way that people get “hooked” on Zynga games, and some Wall Street analysts are whispering that it’s only a matter of time before this draws real ire from governmental regulators here in the U.S. and abroad. Just this week, for instance, a woman in Maine was convicted of embezzling $166,000 from her employer to feed her addiction to Zynga games. The larger media loves these kinds of stories, and in the future some politicians may well seek to regulate the industry in the name of “protecting consumers.”

    This may be far-fetched, though: Zynga games are just entertainment, unlike gambling, in which real money flows both in and out. Games such as World of Warcraft have similarly addictive qualities, and they have not come under too much scrutiny, at least from U.S. officials. But Zynga games are arguably more likely to be in the spotlight because they appeal to a more mainstream audience than other online games have in the past. It will be interesting to see how this plays out in the months and years ahead.

In all, Zynga has lots of potential for growth now that it’s got the money and larger respect that comes with being a public company. Its story does not end with this week’s IPO: As interesting as it has been to watch the company over the past few months, the road ahead promises to be even more interesting.

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  1. Nice article Colleen!.. very well stated with great insight.

    1. Thanks Sean, I appreciate it.

  2. I suspect the stock is going to tank. They are unable to release code that is not buggy, and they have many long standing bugs that have not been fixed. I have been losing neighbors in my zynga games steadily for months, and new players rarely even last a month. I personally will never start another zynga game, and am about fed up with the only one I still play. With a continual loss of existing players and inability to keep new players, the writing is on the wall.

  3. Michael Gary Nienaltowski Friday, December 16, 2011

    Loved the article as well.

  4. Colleen, thanks for sharing this. Somebody else say MS’s lock-up expired on 1/25. Where do you find the 165 day number?

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