Zynga IPO Flop Proves Social Media Listings Are Still Suspect

By Kerri Shannon, Associate Editor, Money Morning • December 16, 2011

A strong debut by Zynga Inc. (Nasdaq: ZNGA) today (Friday) could have redeemed the tarnished reputation of social media companies. Instead, the online game-maker became the latest addition to salvage yard full of over-hyped social media companies that didn't live up to the promise of their initial listings.

After debuting at $10 a share, Zynga stock tumbled 7.75% to $9.25 in just four short hours of trading.

Money Morning Capital Waves Strategist Shah Gilani wasn't surprised.

"I don't particularly like the position the company's in. It's got a lot of competition at its heels and I'm not sure about the valuation of the stock," he said on Fox Business' "Varney & Co." program this morning. "I think there's a lot of hype in the social media space."

Indeed, Zynga's failure follows in the footsteps of Pandora Media Inc. (NYSE: P), LinkedIn Corp. (NYSE: LNKD), and Groupon Inc. (Nasdaq: GRPN).

But that's not all.

Here's what Zynga's initial public offering (IPO) means to investors going forward:

• Zynga will set the tone for 2012: The tech IPO market this year has fizzled, and was in desperate need of a spark that Zynga didn't provide. This is an undesirable lead-in for Facebook Inc., which is expected to debut in the second quarter of 2012. It might also hurt Yelp! Inc., the business review site that filed for an IPO on Nov. 17.

• It could influence future tech-IPO overpricing: Zynga 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 range of $8.50 to $10. If it fails to close above $10 a share today, future tech IPOs may rethink their strategies.

• Zynga stock might join the sector's downward trading pattern: Not all tech stocks that came to market this year are now trading below their IPO price, but they have slipped significantly from their first-day closing price. LinkedIn soared 109% from its IPO price in the first day. Its shares are still trading about 50% higher than the initial offer price, but have sunk 30% from their first-day close.

  Then there's Pandora, which closed only 8.9% higher than its initial price in the first day of trading. Pandora is now down about 37% from its IPO price and 40% from its first-day close.

  U.S. tech stock Jive Software Inc. (Nasdaq: JIVE), which went public Tuesday, gained 25% in first-day trading, and is so far about even with its first-day $15.05 closing price.

  Zynga stock could underperform all of these if it closes below its initial price.

News and Related Story Links:

• The Financial Times:
  Zynga eyes growth paths as IPO pricing looms
• USA Today:
  Zynga readies for its IPO
• Forbes:
  Zynga: Buy the IPO, BTIG’s Greenfield Advises
• The Economic Times:
  Can Zynga break free from Facebook?
• Money Morning:
  Hot Stocks: Don't Let Groupon Inc. Play You For a Fool
• Money Morning:
  The Facebook IPO: Why Facebook Subscribers Should Get a Piece of the Action