Zynga shares hit yet another new low

Social games maker's shares fall below $8 as investors grow wary of strategy risks

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Shares of Zynga (NASDAQ: ZNGA) plunged Monday following the disappointing reaction last week to a new release and the belated realization of investors that the social games maker is heavily reliant on Facebook and a tiny percentage of users who actually pay for games.

Zynga's stock fell as low as 7.97, or 9.5%, Monday morning before rebounding slightly to 8.05 by early afternoon.

Zynga on December 15 had the largest Internet IPO since Google's in 2004, raising $1 billion. But shares finished the first day at 9.50, below the $10 offer price, an embarrassing and unusual occurrence for a major and highly touted Internet public offering.

Which is slightly ironic in that Zynga is profitable, whereas other high-profile Internet companies that went public last year -- daily-deals site Groupon and professional social networking site LinkedIn -- are money-losers, yet they fared far better on IPO Day.

Morgan Stanley announced on Friday (after the market closed) that it now owns about 16 million shares of Zynga, or 16% of the company's 100 million outstanding shares.

I don't think that's the catalyst for Monday's share-price drop, though. More likely it's the lingering concerns about Zynga's over-reliance on Facebook (from which it derives 94% of its revenue) and a small group of sad, underachieving get-a-lifers dedicated players, underscored by a neutral rating last last week from Macquarie Group analyst Ben Schachter.

While Zynga reports 150 million users, only 2.2% (or about 3.3 million) actually pay to play, according to Schachter. Further, 70% of Zynga's annual $800 million in revenue comes from only 680,000 of these paying customers.

In other words, based on Schachter's estimates, 70% of Zynga's annual revenue comes from less than one-half of 1 percent of its customers.

What could go wrong there?

These risks for the maker of FarmVille, CityVille and Mafia Wars were spelled out quite clearly in Zynga's S-1 filing. I don't know why it takes an analyst to point out the obvious to investors, but apparently it does.

On an amusing side note: Recently Zynga was criticized by myself and others for its high-pressured work environment. Much of this criticism came from anonymous employees on the workplace review site Glassdoor.com.

Well, the HR or communications folks at Zynga must have discovered Glassdoor, because the latest employee review is a gushing entry about life at Zynga that begins with, "Literally everyone you work with is a rock star."

Dude, you're making little video games for idiots. Get a grip.

That ringer review isn't fooling everyone.

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