The Time Has Arrived: Zynga (ZNGA) Turns Public

avatar By: IS
Date posted: 12.16.2011 (5:45 am) | Write a Comment  (5 Comments)

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It’s an exciting day for me. No, not the type of day that I wake up wanting to jump up and down 10 times (maybe when Facebook will go public it’ll feel that good) but it’s still a great day because Zynga, one of the companies that I have been discussing for a very long time is finally turning public. The IPO was priced at $10, a $7B valuation for the company and should start trading today on the Nasdaq exchange. In case you did not know, a company that goes public will typically give a range at which it expects to sell its shares. Then, depending on demand, the number of shares available and how much each investor is willing to pay, a final price will be made public. In general, there has to be a balance between two different things:

-IPO investors are generally the underwriter firms best clients so they want the price paid to be low enough for those investors to make some money
-However, the higher the price, the more money comes in for both the underwriter firm and the company (Zynga in this case) itself.

LinkedIn (LNKD) was a case of a stock that turned public well below what it ended up trading for which ended up meaning that:

-IPO investors made a ton of money
-Linked (LNKD) ended up selling its shares at a very cheap price
-Underwriters were heavily criticized

It will be interesting to see how things will play out for Zynga. As I’ve said many times, I think that while there is a decent amount of risk involved, it’s a bet that I would be willing to put up with. I think the growth in social gaming will be significant and Zynga is the dominant player in this space.

Risks Are Overblown

I think the 2 main risks that are being discussed are worth discussing but not significant in my opinion:

Zynga depends too much on Facebook

While it’s true that Zynga depends on Facebook for an overwhelming majority of its revenues, I think it’s too easy to say that the company is worth less because of that.

Facebook is also very dependant on Facebook: Not only is Facebook making a huge part of its revenues (both in advertising and through its credits) from Zynga but damaging that relationship would end up hurting the confidence level of other partners.

Despite Rumors, Facebook Will Not Start Making Games: Another big rumor is that eventually, Facebook will start making its own games. Is it impossible? No. But I don’t see it. I believe Mark Zuckerberg when he says that Facebook will not be in that market. It makes no sense for Facebook to start producing games, licensing music, etc. Facebook seems much better off trying to tax all companies using its environment/infrastructure.

Zynga Depends On Its Ability To Produce Hits

No doubt, coming up with winning games frequently will be a major challenge. I do think that Zynga has things setup in a way to be able to produce these. Zynga has produced several very popular games, has a solid user base and will have cash. It will be able to acquire smaller, promising games, talented individuals and promote those games better than any other player. Time will tell if I’m right about this but I expect Zynga to be able to produce over long periods of time. One thing to note is that for several years, main gaming competitors such as Electronic Arts and Blizzard were not competing too much in social gaming and that is changing very quickly. However, I think there is enough space for several large players and for now, I think Zynga can compete.

It Remains A Gamble

I’ve had a good 2-3 years of stock picks in technology and you would think that I would have a stronger opinion about ZNGA. The truth is, I think it’s worth a gamble, a shot at being a long term speculative pick. The investment might not work out but I personally think it’s worth trying.

It All Depends On The Price Of Course

Every asset has a price at which I could buy or sell. Ok, I’m sure you could find exceptions but I think you get the idea.The main thing is that I do not know how ZNGA will be trading, especially in the first few days/weeks. I was asked a few times how I will be trading a stock like ZNGA that goes public.

How Will I Try To Buy?

What I will not do is place market order (I try to never do that) or even a limit order today or probably even next week. I personally prefer staying away from all of these crazy movements. I am in no hurry to buy and I prefer to wait to have the feeling that the price is less volatile. Once that happens, I will evaluate the cost and value and decide on buying accordingly.

There is no way I will try buying the stock when it’s moving by 10-20% or even much more…

So how about you? Do you intend on buying ZNGA? If so, how and when?

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5 Comments

  1. Comment by awake — December 16, 2011 @ 8:18 am
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    Alas… a post on how you would trade Zynga (or any IPO for that matter). Keep us updated on your thoughts about the company as time goes on.

  2. Comment by Intelligent Speculator — December 16, 2011 @ 9:00 pm
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    @awake – Yes, hope that helped a bit:) LOVED seeing no pop in ZNGA today:)

  3. Comment by Invest It Wisely — December 17, 2011 @ 12:42 pm
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    Did you hear how they tried to push some employees with options out before the IPO? Kind of cold…

  4. avatar

    […] profits. Advertising is one of course, but so are credits, taking companies that use its ecosystem (Zynga, TripAdvisor, Netflix, etc). Facebook could create a highly personalized ad target that would rival […]

  5. avatar

    […] I’ve discussed Zynga quite a bit as a great play on Facebook ($FB), it’s been a tough company to figure out as there isn’t that much news being released and it’s unclear how things are going with increased competition from other gaming companies. I do think that if it can do anywhere close to what most expect, it will prove to be a great trade as its forward P/E is almost identical to Blue Nile’s, which is crazy on many different levels. […]

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