When Facebookembarks on what will be the largest Internet IPO ever, the social media sector is bound to feel a ripple effect. Social game developer Zynga is one of the best positioned stocks to ride the wave, according to analyst Daniel Ernst of Hudson Square Research.
“The Facebook filing revealed just how important Zynga is to Facebook. It’s 12 percent of revenues. The relationship is symbiotic,” said Ernst.
So far, shares of Zynga rallied up from $9.52 to $14.44 since Jan. 26 on the run up to Facebook's IPO filing.
The danger is that Zynga’s potential upside has already been priced in. Another concern is that the social media site is its lifeline: Facebook accounts for roughly 95 percent of Zynga's revenue.
But Zynga has something else Facebook wants: The ability to make money on mobile devices.
“Some of most popular apps on the iPhone and Android have been Zynga apps, like ‘Words with Friends.’ Its free to play, but you buy credits inside the game,” He recalled. “It's what got actor Alec Baldwin kicked off an airplane in December.”
Facebook has yet to monetize visits from mobile users, which has some speculating that Zynga could soon be a takeover target. But Ernst doubts it.
“Ultimately in tech, you want to be the platform — you don’t want to compete too much with the people that leverage it. If (Facebook buys) Zynga, they might scare off other app developers,” he added.
Conventional wisdom, however, may not apply to CEO Mark Zuckerberg, who coined Facebook's motto: "Move fast and break things."
(CORRECTION: A previous version of the story incorrectly reported Zynga's share price has risen from $2.42 to $42.74 since Jan. 26. Zynga's share price increased from $9.52 to $14.44 during that period.)
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Daniel Ernst does not own shares of Zynga or Facebook.