Zynga IPO: The Game Just Got Harder

Wasn't Zynga supposed to be a slam-dunk IPO? It sure seemed like it when the
company filed its S-1 back in early July. But of course, since then the equities
markets have experienced extreme volatility. As a result, Zynga has delayed its
offering. But Zynga might have more to worry about. According to its latest
filing, the company has experienced a slowdown in the business. In the second
quarter, Zynga attracted 59 million average daily users, which compares to 62
million in the prior quarter. As a result, bookings dropped by about 4% this
never has happened for Zynga. The problem? The company has had a dry spell with
its games. Let's face it: Zynga's audience can be extremely fickle. And it
is getting more expensive to develop social games. In the latest quarter, Zynga
hiked expenses as profits plunged from $16.8 million to $1.4 million. During the
past year, the headcount has gone from 1,483 to 2,451. Zynga also is feeling
strong competitive pressures, especially from Electronic Arts (NASDAQ: ERTS ).
Once considered a has-been, the company has made some savvy acquisitions, such
as for Playfish and PopCap. Electronic Arts also has been leveraging its
extensive gaming franchises. For example, it launched The Sims Social title just
three months ago and it already is the No. 2 game on Facebook, with 53 million
monthly active users. Zynga still is a great company and is growing at a rapid
clip, so the company still should be able to pull off its IPO. As seen with the
shares of LinkedIn (NYSE: LNKD ), investors still are hungry for social plays.
But Zynga might have to get more realistic about its valuation. And during the
next couple years, it is likely Zyngas growth rate will continue to trail off as
more competition enters the market. Tom Taulli is the author of "All About
Short Selling" and "All About Commodities." You can also find him at
Twitter account @ttaulli. He does not own a position in any of the stocks named
here.