Zynga’s Competition, Insider Selling Raise Concerns: Analyst

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Coming up with the next hot Internet game is far from child’s play, and that’s what worries Needham & Co. analyst Sean McGowan about Zynga.

“People are concerned about the rising competition and the likelihood of a lot of insider selling,” he told CNBC’s “Street Signs” Thursday. “That’s what’s been driving the stock down over the past month.”

Zynga’s newest game, DrawSomething, which came through an acquisition, is “a great app,” he said, but it “hasn't kicked into their numbers,” which will be reported next week.

“That was the first game not made by Zynga that was actually rated on Facebook more highly than other Zynga games. It’s a reminder of competition,” he said.

“When you have extremely high market share, sometimes there’s nowhere to go but down,” he added.

Last month, Zynga alerted shareholders in a filing that it would be given a chance to start selling about $591 million in Class A shares, after the company waived the requirement that investors wait six months after its initial public offering to sell shares. Zynga went public in December.

“Not everybody has penny stock, and a lot got in fairly recently and are underwater now in their shares. The sheer number of shares that could come out over the course of the next year are in the hundreds of millions,” said McGowan, who raised his rating on the shares to “underperform” from “hold.”

Zynga’s recent secondary offering “was an orderly way of dealing with that [insider selling] but there’s a lot more to come,” the analyst said.

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McGowan does not own Zynga shares, but Needham provides research for and makes a market in Zynga.