Downgrade takes air out of Zynga shares

J.P. Morgan lowers social games maker's rating, halting recent stock rally

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A downgrading by investment bank J.P. Morgan sent shares of social games maker Zynga (NASDAQ: ZNGA) tumbling 7% Monday morning, blunting -- at least temporarily -- the company's recent momentum on Wall Street.

Zynga shares fell 1.04, or 7.0%, to 13.65 early Monday after J.P. Morgan analyst Doug Anmuth cut his rating for the company to "neutral" from "overweight," while maintaining a $15 share-price target.

Essentially Anmuth is arguing that Zynga shares were getting ahead of themselves due to several positive catalysts over the past five weeks or so.

Remember, this is a stock that had a disappointing ticker debut in mid-December, finishing the day at 9.50, below the $10 offer price. It closed at $8 on January 9.

But in late January, rumors began that Facebook would be filing to go public. This pushed Zynga shares over $10 for the first time since the IPO. The stock got another boost on February 1 when Facebook filed its S-1 with the Securities and Exchange Commission, revealing that the social networking giant derives 12% of its revenue from Zynga. By mid-February, shares had climbed over $14.

A fourth-quarter loss reported on February 14 knocked shares below $12 and resulted in several analyst downgrades.

But the stock climbed back, fueled late last week by news that Zynga was creating a platform for gamers on its own website, a move designed to lower the company's dangerous dependence on Facebook, from which it derives more than 96% of its revenue.

While arguing in a note to clients that Zynga could benefit from several "key Internet trends, including social, increased smartphone and tablet penetration, the rapidly growing app economy, and the secular shift toward free-to-play games," Anmuth adopted a cautious stance regarding Zynga's new gaming platform.

"[G]ame economics will not change for Zynga, and it will likely take some time to drive traffic to the new site and for players to get comfortable with an additional gaming destination," Anmuth wrote.

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