Although social game developer Zynga's IPO was widely expected to do well Friday on its market debut, the stock quickly fell below its initial public offering price as many analysts are cautious about the company’s long-term prospects.
Zynga shares opened $11 per share on Nasdaq this morning, above its $10 IPO price. However, after a quick 12 percent jump, the stock crossed into negative territory to end the day 5 percent lower at $9.50.
Even before its market debut, Zynga got cautious reviews from analysts.
Cowen analyst initiated the company at “neutral” Friday.
“Although we believe that Zynga has done an excellent job of positioning itself as the leading player in Facebook gaming, we have significant concerns about the company's ability to maintain growth at a level that justifies its current valuation,” reads the note.
Cowen is also worried that Facebook's changed permission policies will slow game adoption and says Zynga’s share of gaming daily active users has declined to 38 percent from 50 percent.
Moreover, Cowen believes that Zynga's aggressive and competitive corporate culture could be a stumbling block to its further growth.
“We are concerned that Zynga's culture may not be congruent with creativity,” says the report.
Sterne Agee rated a “sell” even before its IPO priced.
“Zynga’s growth is slowing even faster than what is obvious at first, its margins are under pressure, and free cash flow has been declining recently; thus we believe the implied valuation in the IPO is not justified,” said Sterne Agee’s Bhatia in his note Tuesday.
The firm has a $7 price target on the stock.
But Zynga got a vote of confidence from analysts at BTIG, who initiated the company with a “buy” rating and a $13 one-year price target.
While agreeing that Zynga’s reliance on Facebook platform is hard to dismiss, BTIG thinks “it is in both companies' interest to keep each other happy and healthy at least over the next couple of years.”
BTIG calls social gaming and Zynga a new “cure” for boredom.
“While it may be viewed as the next big Internet IPO with comparisons being made to other social-networking driven companies, such as Linkedin or Groupon, Zynga is really a media company focused on taking a greater share of your time and money spent on entertainment,” BTIG said.
Zynga raised $1 billion by pricing 100 million at $10, the high end of the range, becoming the largest tech IPO since Google.
The company will have approximately 700 million shares outstanding after the offering, giving it a valuation of $7 billion.
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