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A Tech IPO Bellwether: What to Watch as Zynga Stock Starts Trading

Social-gaming giant Zynga Inc. starts trading today (Friday), capping off a rocky year for tech initial public offerings (IPOs). A strong performance from Zynga stock today and into the New Year would shed the "bubble" reputation surrounding the sector in 2011.

Here's what you need to know about this latest tech IPO:

  • Zynga will set the tone for 2012: The tech IPO market this year has fizzled, and could use a spark. Zynga could provide one. Scott Sweet of IPO Boutique told clients in an e-mail Wednesday morning there was more investor interest in Zynga than available shares. A strong debut for Zynga stock would be a good lead-in for Facebook Inc., which is expected to debut in the second quarter of 2012. It might also help Yelp! Inc., the business review site that filed for an IPO on Nov. 17. Finally, it might even subdue talk that tech is doomed for a second dot-com bubble.
  • It's Facebook-dependent: Zynga's growth is tied directly to Facebook. It generates a whopping 95% of its revenue through the social networking site, and that's not going to change anytime soon. While the relationship is an incredible revenue boost for Zynga, it's also a huge investor concern. If the business relationship soured, Zynga's revenue stream would dry up immediately.

    Still, this dependence could give Zynga stock a boost, in that investors eager to profit from Facebook's growth can do so with the social gamer.

    Zynga's contract with Facebook isn't up for review until 2015, giving Zynga three years to develop new revenue sources and decrease its Facebook dependence - if it proves detrimental. The company plans to push its product toward high-growth Asian markets.
  • It could mark the end of drastic tech-IPO overpricing: Zynga has drastically scaled back its initial pricing by more than 50% since July, when it was valued at $20 billion. Tech IPOs priced earlier in the year received a barrage of criticism for overpricing, but there's been much less of the same talk surrounding Zynga's adjusted range.

    BTIG analyst Richard Greenfield recommended participating in the IPO in the $8.50 to $10 range, and said even at the higher end he thinks it could yield up to a 50% return for investors within a year. Greenfield said the lower IPO price range favors investors and expects the company's revenue to grow by about 45% over the next two years.


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