It’s been almost a month since Zynga’s (Nasdaq: ZNGA) IPO. And it’s safe to say the stock hasn’t lived up to investors’ expectations.
Shares were trading for $9.50 at the closing bell on day one. And the stock dropped to $8.24 yesterday morning, representing a 14% dip.
Of course, if you fell for the IPO-hype, as many investors so often do, you’re not alone.
Morgan Stanley (NYSE: MS) – which led the IPO – reports that it owns a 16% stake in the company, which it purchased at $10 per share.
Sadly, shares have failed to trade above $10 since the stock went public. And that initial stake of $160 million is only worth a lackluster $136 million right now.
Granted, some of the volatility can be chalked up to the fact that only a small amount of shares are available publicly.
But you can’t ignore the fact that the company’s business model raises some red flags – flags that we made sure to point out before the IPO…
Hate to Say it, But We Told You So
Two days before Zynga’s IPO, my colleague, Louis Basenese, outlined seven reasons you should ignore the hype.
Given Louis’ warning signs, the next day I encouraged you to consider a safer way to play the social gaming craze with Electronic Arts (Nasdaq: EA). Which – to be fair – is down 13% since that article. But as I said at the time, unlike Zynga, EA can more easily weather such dips in share price since it doesn’t rely solely on social and freemium games.
As we both mentioned, one of the biggest problems with Zynga’s business model is that it collects 96% of its revenue from less than 3% of its users.
That’s why Ben Schachter, an analyst from Macquarie, slapped a neutral rating on the stock last week, even though he’s bullish on the online video game movement overall.
And recent developments suggest that Zynga’s decline isn’t about to slow down any time soon.
Zynga’s Bizarre, Brute-Force Rationale
Zynga launched two new games Wednesday and Thursday of last week: “Hidden Chronicles” and “Scramble with Friends.” A move that should have given shares a nice boost.
It didn’t. Shares actually took their sharpest nosedive that following Friday.
Part of the sell off is likely due to the fact that “Hidden Chronicles’” game play, which involves finding hidden objects on the screen, closely mimics a popular Facebook game from 2011 called “Gardens of Time.” And releasing unoriginal content as one of your first game launches post-IPO isn’t going to win over investors – or subscribers.
Not that Zynga’s concerned…
Zynga’s COO, John Schappert, recently responded to concerns about the churn rate the company is seeing in its user base. To fight the trend, according to Reuters, “Schappert said his company can quickly launch new games, attracting more players. In addition, [Zynga’s CFO] Wehner said a Zynga game’s bookings – a measure of revenue – can maintain a level rate, even as the number of daily average users falls.”
In other words, “Forget building quality games to maintain customer satisfaction. Let’s keep pumping out new material as fast as we can to make up for all those users running for the exits.”
Needless to say, this business strategy isn’t going to keep subscribers and investors happy in the long run. As MSN Money’s, Kim Peterson, says, “Being popular on Facebook is a far cry from having the steady, growing profit stream that investors like to see.”
For more news on Zynga, check out Louis’ recent appearance on CNBC where he discussed his latest take on the company’s position in the growing online and social gaming industry.