Zynga stumbles in Wall Street debut

Social gaming company's shares fall below $10 offer price

Zynga went public to much fanfare on Friday, and early results show something quite surprising: Investors aren't really buying into the Zynga story.

The social gaming company on Thursday priced the 100 million shares being offered at $10. After jumping out of the box to reach 11.50 shortly after shares (NASDAQ: ZNGA) began trading at 11 a.m., Zynga's stock fell to as low as 9.48, or 5.2% below the offer price.

No other major Internet IPO saw shares drop below the offer price on Day 1: Not LinkedIn, not Groupon, not Pandora Media, not Jive Software, not even a dog like Demand Media.

Now, this stumble out of the box in terms of share price may be due in large part to Zynga's huge float. The company flooded the market with 100 million shares. Contrast that with the other IPOs mentioned above:

Demand Media -- 8.9 million

Jive Software -- 13.4 million

Pandora Media -- 14.7 million

LinkedIn -- 7.8 million

Groupon -- 35 million

What's just as likely, however, is that investors are leery of the weaknesses in Zynga's business strategy. While the company is profitable -- unlike the others I've cited -- it is heavily dependent on Facebook, which provides Zynga with 94% of its revenue through Facebook users playing games such as FarmVille, CityVille and Mafia Wars.

Further, as Zynga itself noted in its S-1 filing, "A small percentage of our players account for nearly all of our revenue," and "Historically we have depended on a small number of games for a majority of our revenue and we expect that this dependency will continue for the foreseeable future."

All of that spells risk to potential investors. It's reminiscent of the first Internet Gold Rush, when one company after another that went public had, in some cases, just one or two major customers, and thus one or two revenue streams. Back then, investors were willing to ignore that risk and take a leap of faith because we were in uncharted territory. Many of them ultimately got burned.

It also probably didn't help Zynga's IPO when Sterne Agee analyst Arvind Bhatia earlier this week gave the company's stock a "sell" rating and a target price of $7, writing in a note to clients, "While we believe in the potential for social games, we think 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."

Update: As of 1:42 p.m., Zynga was at 9.21, after hitting a new first-day low of 9.20. It appears CEO Mark Pincus's awesome alleged fearsomeness is failing to inspire Wall Street.

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