Zynga CEO Mark Pincus, center, and his wife Ali, left, are shown after Pincus… (Reuters )
After a promising start, Zynga Inc.'s shares dropped below its $10 offering price the day it debuted on Nasdaq, closing at $9.50, as investors show signs of weariness over companies with major social networking components.
Zynga's two dozen online games -- including Words With Friends, CityVille and Mafia Wars -- draw more than 150 million players every month on Facebook, mobile phones and other social networks.
Its meteoric rise has caught the attention of many prominent investors, including Bing Gordon, a partner with Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers, and Jeffrey Katzenberg, head of DreamWorks Animation SKG Inc.
"In four years, Zynga has grown from nothing into a company that now has 2,000 employees and produces exceptional work," Katzenberg said. "It's become one of the greatest gaming companies in the world."
The San Francisco social gaming company's highly anticipated initial public offering this week raised more than $1 billion, the most for a U.S.-based Internet-related IPO since Google Inc.'s debut in 2004.
But Zynga followed the classic pattern exhibited by many other technology IPOs this year: an enthusiastic early reception on the first day of trading, followed by a drop in price as investors begin to look more closely at the risks.
With Zynga, the decline happened much more quickly -- within hours instead of days. Its shares soared to $11.50 in early trading Friday, only to slip to $9 by the afternoon.
"Their first-day pop has turned into a first-day drop," said Francis Gaskins, editor and president of IPOdesktop.com in Marina del Rey. "Investors have lost their starry-eyed look for social networking stocks."
IPOs from Groupon Inc., Pandora Media Inc., LinkedIn Corp. and Zillow Inc., for example, saw their shares surge between 9% and 109% on the first day of trading. And all saw their prices fall back to Earth in subsequent days before leveling off in the weeks and months after their debuts.
Zynga Chief Executive Mark Pincus said in an interview that he was unfazed by the stock's initial performance.
"The value of what we are will be measured in terms of quarters and years, not in terms of trading days," Pincus said. "What really matters is that over the next eight, 12 quarters, we build products that deliver on the promise of social gaming."
Many analysts expressed reservations about Zynga's ability to continue growing both its revenue and its profits.
"Although we believe that Zynga has done an excellent job of positioning itself as the leading player in Facebook gaming," Cowan & Co. analyst Doug Creutz wrote, "we have significant concerns about the company's ability to maintain growth at a level that justifies its current valuation."
Creutz suggested that gaming activity on Facebook, where Zynga makes the bulk of its revenue, is starting to slow.
John Schappert, Zynga's chief operating officer, said his company is on track to grow beyond Facebook.
"We've got five great vectors for growth," Schappert said in an interview. "We have our existing franchises, which continue to generate strong income. We also have new franchises, with CastleVille being our most recent release. We've also got mobile, which has grown from less than 1 million daily players to more than 11 million in two years. And we're expanding internationally."
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Zynga Inc. IPO
Deal size: The San Francisco developer of online games CityVille and FarmVille sold 100 million shares at $10 each, raising $1 billion. It was the largest IPO for a U.S. Internet-related firm since Google Inc. raised $1.66 billion in August 2004.
First-day pop: Zynga stock finished its first day of trading on Nasdaq at $9.50, losing 5% of its value. It traded as high as $11.50 shortly after the session opened, but soon deflated, falling as low as $9.
2010 revenue: $597.5 million
2010 net income: $90.6 million
Employees: More than 2,000
Audience: More than 150 million players from 166 countries
Source: Los Angeles Times research