After months of hype and speculation, Zynga, the 4-year-old games company behind FarmVille and Words with Friends, has had a disappointing debut on the Nasdaq stock exchange.
Many tech firms enjoy spectacular first-day "pops", with stratospheric rises in their share price in the early hours of trading. Zynga's shares, priced at $10, rose 11% initially, before closing out the day at $9.45. Wall Street, it seems, isn't playing Zynga's game. At least not yet.
The company, which claims 60 million people a day play its games, raised about $1bn from the share sale, and is worth a total of $7bn, far less than the $20bn that had been expected earlier this year.
Founder Mark Pincus, who named the company after his pet bulldog, now owns a stake worth over $1bn. He cashed in some of his shares ahead of the sale, selling a small portion of his holding for more than $109m back in March, according to regulatory filings.
Unlike many other young web companies, Zynga is profitable. The company makes money by selling virtual goods in its popular games such as CityVille, FarmVille and Mafia Wars. In the first nine months of the year, Zynga's revenue doubled to $829m from a year earlier, but its net income declined 35% to $31m.
Zynga is highly dependent on Facebook, whose users account for 94% of Zynga's revenue, according to analyst Arvind Bhatia of Sterne Agee Group. Bhatia issued a negative report on the company Tuesday claiming growth is slowing at the company and its margins are under pressure.
Facebook takes a third of the game firm's revenues, and analysts expect Zynga to use its new cash pile to expand into the rapidly growing mobile gaming market and away from its social networking.
John Wilson, partner at San Francisco law firm Sherman & Sterling, said Zynga was a major beneficiary of the Facebook effect. "It's in the social network space and it's affiliated with Facebook," he said. Facebook gives the company an "extraordinary reach. And they are able to leverage that relationships with the most remarkable company story since Google," he said. "The real test is where will it be six months from now."
Perhaps Zynga's lack of zing isn't such a bad thing. Many recent tech IPOs have enjoyed a first-day pop only to quickly lose steam. Groupon surged 31% on its debut as a public company, and business-focused social network LinkedIn jumped 84%. Both are now trading well below those prices.
According to Birinyi analyst Kevin Pleines, tech IPOs have popped an average of 31% from their IPO price after the opening bell on their first day of trading. But 18 of the 30 stocks he looked at are now below their IPO price, and 24 of the 30 are below their opening price on their first day of trading.
Wilson said the pops were part of the process and that the big winners in technology, such as Google, had similarly leapt up in price on their first day of trading but gone on to outperform.
"The issue now is that there is so much money on the sidelines," Wilson added. "Pension funds, hedge funds, private investors. And they are getting so little from fixed income investments that when something with potential comes along, there's a stampede."
Zynga's debut is the latest test for an IPO market that took a hit after a summer slump. Many other new tech firms were planning IPOs earlier this year before stock markets were thrashed by the crisis in Europe and the debt ceiling row in Washington.
Wilson said he expects many of those firms to go public next year, led by Facebook. Figures leaked this week suggest Facebook will aim for a valuation of $100bn when it goes public next year – about the same value as soft drinks and food giant Pepsi Co.
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