Zynga Pre-IPO Downgrade

Dec 14, 2011
J. Webster
Comments Off on Zynga Pre-IPO Downgrade

This is fantastic. In what seems like something out of the Onion, Sterne Agee has downgraded Zynga before it’s even trading, before its IPO. Why wait to put a sell rating on a stock when you can do it before it’s a public company.

Usually, especially with Internet related “growth” stocks, they soar after their IPO only to become excellent short opportunities. Do we finally we have some genuine truth telling on Wall Street rather than pushing the greatest time waster of a stock there’s ever been? So it seems. I guess what the analyst is saying to Zynga is why even go public.

The Farmville-creator — whose initial public offering is set for Thursday evening — faces slowing revenue growth and has too much dependency on Facebook, according to Arvind Bhatia.

“Farmville, the company’s flagship title which helped generate hyper-growth in the past, has peaked and the other titles are coming on line at a much slower pace,” the analyst wrote in a note to clients Tuesday.

“While we believe in the potential for social games, we think Zynga’s growth is slowing even faster than what is obvious at first. Its margins are under pressure, and free cash flow has been declining recently; thus we believe the implied valuation in the IPO is not justified.”

Zynga is scheduled to offer 100 million shares at a price between $8.50 and $10 apiece, giving it a market value of $7 billion if it prices at the high end of the range.

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