Zynga falters in debut, sheds doubt on IPO market(reuters.com)
reuters.com
Zynga falters in debut, sheds doubt on IPO market
http://www.reuters.com/article/2011/12/16/us-zynga-idUSTRE7BE26O20111216
11 comments
You didn't say otherwise, but to be clear: revenue isn't profit. Somehow I think a failed Activision title costs a lot more to produce than a failed Zynga launch.
(I don't know the numbers behind what Zynga is doing well enough to make any judgement on their IPO in general)
(I don't know the numbers behind what Zynga is doing well enough to make any judgement on their IPO in general)
I'll say this: a company's products are IMO a far better predictor of future success than any of its ledgers and reports.
RIM was financially extremely successful for years, even though they were no longer building competitive products. It takes time for the books to catch up to reality.
Looking at Zynga's products, and looking at Activision's products, I know who my money is on for still existing in five years. The only thing I hear about Zynga outside of startup-IPO talk is about people quitting their games. Social gaming, in its current incarnation (that dastardly, insidious, vampiric incarnation) experienced a surge of novel popularity, and is quickly fading.
Contrast with Activision (and EA, and any of the major publishers) who seem to be selling more and more copies and gathering more and more fans with every iteration of their major franchises.
One company stands atop products with increasing popularity and mass-market appeal. The other has ridden past the highs of a fad and is on a slow spiral to irrelevancy.
Who else here feels like there are parallels to be drawn between this and Groupon? Companies past their prime, products with dubious futures... and overall widely criticized by industry insiders for being poor bets. Yet IPOed anyways, all smelling like just a way for people to cash out while they still can.
RIM was financially extremely successful for years, even though they were no longer building competitive products. It takes time for the books to catch up to reality.
Looking at Zynga's products, and looking at Activision's products, I know who my money is on for still existing in five years. The only thing I hear about Zynga outside of startup-IPO talk is about people quitting their games. Social gaming, in its current incarnation (that dastardly, insidious, vampiric incarnation) experienced a surge of novel popularity, and is quickly fading.
Contrast with Activision (and EA, and any of the major publishers) who seem to be selling more and more copies and gathering more and more fans with every iteration of their major franchises.
One company stands atop products with increasing popularity and mass-market appeal. The other has ridden past the highs of a fad and is on a slow spiral to irrelevancy.
Who else here feels like there are parallels to be drawn between this and Groupon? Companies past their prime, products with dubious futures... and overall widely criticized by industry insiders for being poor bets. Yet IPOed anyways, all smelling like just a way for people to cash out while they still can.
Activision has Blizzard, which is an ungodly money making machine. Everything they've touched for the past ~15 years has been a huge success.
People are still playing Starcraft 1 and Diablo 2.
They take a long time to release a game. I'm still waiting for Diablo 3. It's a long wait but it will probably be awesome.
They take a long time to release a game. I'm still waiting for Diablo 3. It's a long wait but it will probably be awesome.
Don't forget Call of Duty.
> I'll say this: a company's products are IMO a far better predictor of future success than any of its ledgers and reports.
Generally I'd agree. Although you get companies like Blizzard who (counter to usual advice) seem to put all their eggs in a couple of baskets, and other companies spread themselves way too thin. Titus' destruction of Interplay and Black Isles speaks of this; I don't think anyone has a clue of why Titus managed to pitch a profitable company into the dirt inside months.
Although again it speaks worlds that one IP (Fallout) was of enough value to resurrect a company from the brink of bankruptcy.
Generally I'd agree. Although you get companies like Blizzard who (counter to usual advice) seem to put all their eggs in a couple of baskets, and other companies spread themselves way too thin. Titus' destruction of Interplay and Black Isles speaks of this; I don't think anyone has a clue of why Titus managed to pitch a profitable company into the dirt inside months.
Although again it speaks worlds that one IP (Fallout) was of enough value to resurrect a company from the brink of bankruptcy.
You didn't say otherwise, but to be clear: revenue isn't profit. Somehow I think a failed Activision title costs a lot more to produce than a failed Zynga launch.
The flip side to this is that Activision and EA's franchises are a lot more protectable. Put it this way, 5 guys in a garage (or more importantly 100 guys in 20 garages) aren't likely making the next Modern Warfare or WOW. But they very well could make the next Farmville.
The flip side to this is that Activision and EA's franchises are a lot more protectable. Put it this way, 5 guys in a garage (or more importantly 100 guys in 20 garages) aren't likely making the next Modern Warfare or WOW. But they very well could make the next Farmville.
I don't have the profit numbers. But I was making a comment on the markets.
If you're interested; Modern Warfare 2 cost around $200 million including marketing and has brought in around $1 billion. Not sure how much MW3 cost but it's bringing in even more than MW2.
If you're interested; Modern Warfare 2 cost around $200 million including marketing and has brought in around $1 billion. Not sure how much MW3 cost but it's bringing in even more than MW2.
How sure are you? You can short the stock if you really believe that.
The float is too thin to short. That is why all new web 2.0 IPO have thin floats. It's easier for larger stake holders to push the price around, and sucker in ma & pa, and momentum traders. But if you look @ ICI data, common folk are getting out of equities. If you own risk in this market, going into 2012, you are a fool. There's a high probability of a financial collapse in Q1 2012.
sounds like you got your economics degree from wikipedia
Please read "how to disagree" - http://www.paulgraham.com/disagree.html
I've got $36. I was going to save it for bread and milk.
"I think the value of social network based games" - there are different concepts of value. One is a present value calculation of future profits. The other is market capitalization. The first might be what the OP was referring to. The second is subject to all sorts of shenanigans that makes shorting risky unless you know what you are doing. (Speaking as someone who has been on the wrong side of a short squeeze of an equity that came crashing down shortly after I covered when the bleeding just got to bad)
I don't think it sheds doubt on the IPO market.
I think it sheds doubt on Zynga.
I think it sheds doubt on Zynga.
Maybe they just priced their IPO shares correctly for a change. When the share price doubles on the first day, it means the offering price was too low. That means Wall Street gets the money, not the company and not the pre-IPO investors.
They could have priced it 40% lower, and seen a big runup. But this way the company gets more working capital. That's good.
Maybe that's a positive consequence of Zynga's CEO's need to hang on to so much control and equity.
They could have priced it 40% lower, and seen a big runup. But this way the company gets more working capital. That's good.
Maybe that's a positive consequence of Zynga's CEO's need to hang on to so much control and equity.
It always amuses me how the avowed capitalist tone of HN changes when it comes to a start-up cashing out. I wonder why "Wall Street" getting the money didn't bother pre-IPO investors and VCs in all the previous tech IPOs or stop them from investing on the same terms again and again. After all, it couldn't be that the same "Wall Street" later rewards those playing by its rules.
I'm very skeptical that all participants of this IPO, from the VCs to the CEO and board to the underwriter, weren't on the same page regarding how the system works and how IPOs work in this system.
I'm very skeptical that all participants of this IPO, from the VCs to the CEO and board to the underwriter, weren't on the same page regarding how the system works and how IPOs work in this system.
That was my first thought.
But it doesn't necessarily shed doubt on Zynga either. What happened here is not that the IPO failed, it's "only" that the price went down from the initial offer. Predicting a "good" initial price is hard. I think people commenting here aren't taking that into account.
Besides, I bet every pre-IPO investor is still making a lot of money on this.
But it doesn't necessarily shed doubt on Zynga either. What happened here is not that the IPO failed, it's "only" that the price went down from the initial offer. Predicting a "good" initial price is hard. I think people commenting here aren't taking that into account.
Besides, I bet every pre-IPO investor is still making a lot of money on this.
Is anyone seriously surprised that this is taking place? Zynga runs a business that is, at it's heart, parasitic and predatory. Such businesses may enjoy short term success but cannot be sustainable in the long run.
There are plenty of parasitic and predatory businesses making motser.
I don't quite understand the problem. Zynga's closing stock price reflects what the market perceives its value to be at market close. Just because it closed down doesn't mean that the market doubts the company. It simply reflects a difference between what they priced it at and and the closing market price.
You could say that this indicates that the bankers did a good job at maximizing the value for the company, and not leaving money on the table for an opening jump in price.
You could say that this indicates that the bankers did a good job at maximizing the value for the company, and not leaving money on the table for an opening jump in price.
or you can say that investment bank client couldn't find dumb money to offload their shares to on opening day. And Pincus & insiders were probably fcking over investment bank clients by offloading their shares.
Investment bank clients are gonna be pissed that their P/L is already negative, day one, because of Pincus offloading.
Investment bank clients are gonna be pissed that their P/L is already negative, day one, because of Pincus offloading.
Problem is - bankers usually price it low expecting a decent pop to keep their big clients that get IPO shares happy. So when one of the hottest companies out there doesn't pop and with Groupon well below their highs - not looking good.
I would agree with that if these were normal times. But the world is in desaster mode, there's talk of depression, and we have a mini dot com bust going on right now. I think, pricing an IPO for a pop in this environment means leaving a lot of money on the table.
The scam works something like this: The banks who back the IPO get the right to sell themselves and large institutional investors (who treat the privilege like being handed a giant bag of money) shares before they hit the market. They buy these reserved shares, wait for the "pop up" in price as everyone scrambles to get in on the IPO, and sell at a considerable low risk profit.
To put it nicely, Zynga or anyone else in their shoes, doesn't really decide how much money is "left on the table." The adults are in the room, and they are making the decisions.
Zynga didn't really "pop" like it was set up to. The banks who had rigged the horse race to be a surefire bet, watched their horse break a leg around the first turn. Sure they still made some money, but nobody involved in inking the deal is looking forward to going into work on Monday.
To put it nicely, Zynga or anyone else in their shoes, doesn't really decide how much money is "left on the table." The adults are in the room, and they are making the decisions.
Zynga didn't really "pop" like it was set up to. The banks who had rigged the horse race to be a surefire bet, watched their horse break a leg around the first turn. Sure they still made some money, but nobody involved in inking the deal is looking forward to going into work on Monday.
Or maybe this story has simply ceased to be true because everybody knows it and investment bankers have come under intense criticism for it. Google held a dutch auction and still apparently left quite a lot of money on the table.
Pincus dumping 100M$-worth sure didn't help. I hope the employees' options were priced low enough.
This article has usage statistics which explain exactly why: http://www.forbes.com/sites/greatspeculations/2011/12/16/zyn...
"Empires & Allies, which was launched in June 2011, peaked soon after its launch at about 48 million monthly active users and has seen a big decline since. Currently, it has around 18 million monthly active users."
As andrewfelix said, none of the games Zynga makes has the same lasting potential as World of Warcraft or Call of Duty. When each new COD title is released, a large mass of gamers shift from one title to the next. There isn't the same transition for Zynga, so none of the same virality.
"Empires & Allies, which was launched in June 2011, peaked soon after its launch at about 48 million monthly active users and has seen a big decline since. Currently, it has around 18 million monthly active users."
As andrewfelix said, none of the games Zynga makes has the same lasting potential as World of Warcraft or Call of Duty. When each new COD title is released, a large mass of gamers shift from one title to the next. There isn't the same transition for Zynga, so none of the same virality.
> As andrewfelix said, none of the games Zynga makes has the same lasting potential as World of Warcraft or Call of Duty.
Financially, this needs to be adjusted for cost of production. I'll go out on a limb and say that a Call of Duty costs vastly more to produce than Words With Friends. It's entirely possible that launching 4 titles annually, where each drops off to 18 million users is a good business. In another genre, id Software was able to make a good business releasing essentially a single title every 2-4 years, targeted at a small subset of male computer nerds. So comparing e.g. WoW to Words with Friends may not be a valid direct comparison.
Without making a big judgement about Zynga one way or the other, I can say that the social/Facebook aspect is just about distribution of their games. That's just the channel, which also happens to be a good buzzword for pricing the IPO at the top of the range. Zynga's business is casual games, which has been a good business for quite some time. Remember all the pre-Facebook articules on how casual gaming is letting companies make money by including women in gaming? The Sims was often cited in this genre of coverage. But again, I'd put hard money down that The Sims cost vastly more to produce than Words With Friends.
Financially, this needs to be adjusted for cost of production. I'll go out on a limb and say that a Call of Duty costs vastly more to produce than Words With Friends. It's entirely possible that launching 4 titles annually, where each drops off to 18 million users is a good business. In another genre, id Software was able to make a good business releasing essentially a single title every 2-4 years, targeted at a small subset of male computer nerds. So comparing e.g. WoW to Words with Friends may not be a valid direct comparison.
Without making a big judgement about Zynga one way or the other, I can say that the social/Facebook aspect is just about distribution of their games. That's just the channel, which also happens to be a good buzzword for pricing the IPO at the top of the range. Zynga's business is casual games, which has been a good business for quite some time. Remember all the pre-Facebook articules on how casual gaming is letting companies make money by including women in gaming? The Sims was often cited in this genre of coverage. But again, I'd put hard money down that The Sims cost vastly more to produce than Words With Friends.
Knowing Pincus' history and the market they're in, I can't say I'm terribly surprised. Having him manage a company I have any shares in at all would make me awfully skittish.
There is some real negative sentiment here, that I understand, but don't at the same time.
Yes, their growth is flattening, they've done some less than honorable things in the past, but if you look at the big picture, they have some great talent (which may or may not be leaving), they really haven't had any prolific product failures or missteps, and they've made a solid name for themselves in the gaming business. (I doubt many of their users or potential users know about the stock option BS or their past with scammy offers)
I'm not saying Zynga is a clear winner, but what I am saying is, they are not a clear loser.
I'm not saying Zynga is a clear winner, but what I am saying is, they are not a clear loser.
You have a good point but to offer a counterpoint, their many problems probably shine through or will shine through in other unpredictable ways. Its almost like having a friend who has a problem they don't want to talk about - after a while you start to notice some oddities. At the least, I would guess that their reported on behavior will drive away talent from working there and probably as a result the quality and value of their products will suffer.
How does this surprise anyone? It made perfect sense a few years ago for Google to go public. They had at a minimum a successful, growing business. It was also clear that there was plenty of room to grow in the core business (search) and that there were many other markets they could enter.
Zynga, to me, is like Groupon. Businesses with no clear foundation. Investing in them is like investing in tulips in Holland in the 1630's.
I feel that if Facebook goes public, that will be successful. They offer something very real, in connecting hundreds of millions of people and, eventually, billions. If you're looking at growing markets, there's at least 3-4 billion more on the way in the next few decades. There's lots of ways to build businesses around that.
Myspace would never have been successful in an IPO. On the surface, they seem like they did the same thing. But the focus of Myspace was always wrong. They weren't really about connecting people at the core. Facebook has been.
Zynga, to me, is like Groupon. Businesses with no clear foundation. Investing in them is like investing in tulips in Holland in the 1630's.
I feel that if Facebook goes public, that will be successful. They offer something very real, in connecting hundreds of millions of people and, eventually, billions. If you're looking at growing markets, there's at least 3-4 billion more on the way in the next few decades. There's lots of ways to build businesses around that.
Myspace would never have been successful in an IPO. On the surface, they seem like they did the same thing. But the focus of Myspace was always wrong. They weren't really about connecting people at the core. Facebook has been.
> I feel that if Facebook goes public, that will be successful. They offer something very real, in connecting hundreds of millions of people and, eventually, billions. If you're looking at growing markets, there's at least 3-4 billion more on the way in the next few decades. There's lots of ways to build businesses around that.
The clear question is how closely Zynga's and Facebook's fates are tied. There is no doubt that Zynga's social gaming really fueled Facebook's expansion in the past several years.
If Facebook's valuation is based on continued exponential growth over their ability monetize their existing base, the foundation is not solid... Zynga's faltering IPO in that case would just be a leading indicator.
The clear question is how closely Zynga's and Facebook's fates are tied. There is no doubt that Zynga's social gaming really fueled Facebook's expansion in the past several years.
If Facebook's valuation is based on continued exponential growth over their ability monetize their existing base, the foundation is not solid... Zynga's faltering IPO in that case would just be a leading indicator.
The surprise, to me at least, is that the stock dipped on day one of trading. Even us negative nellies assumed that Zynga would follow the traditional arc: IPO, hype, price spike, slow fall into obscurity.
But, yeah, overall it's not really surprising. I'm a reasonably young man, but I don't recall another IPO with so much hype and disdain over the company behind it. True, they're printing money at the moment, but that's slowing. The obsession with "social gaming" will not disappear, but it will diminish. No one knows what will happen with Zynga's relationship to Facebook. Combine all that with the fact that Mr. Pincus doesn't come off as a very likable guy but still controls the company, and, well...
But, yeah, overall it's not really surprising. I'm a reasonably young man, but I don't recall another IPO with so much hype and disdain over the company behind it. True, they're printing money at the moment, but that's slowing. The obsession with "social gaming" will not disappear, but it will diminish. No one knows what will happen with Zynga's relationship to Facebook. Combine all that with the fact that Mr. Pincus doesn't come off as a very likable guy but still controls the company, and, well...
Agreed but just a small quible - Zynga just recently became mildly profitable - 25m on 500m revenue which is not exactly a stellar profit margin. So I guess the analogy might rather be they aren't printing money or rather they are printing money that immediately drops into a shredder. I agree though that I would not get my money anywhere close to this place.
Your comment is very hard to interpret without clearly defining what you mean by "clear foundation" and "successful."
Overall you seem very down on Zynga and Groupon. Note that they have both IPO'd and have far from tanked. They are both in business with no apparent sign of bankruptcy etc.
You make them look bad by comparing them to the biggest tech successes(such as Google). The thing is, you can make vast majority of companies look bad in comparison to Google. But that misses an important point about public markets: there is plenty of room for non-googles in the stock market.
Overall you seem very down on Zynga and Groupon. Note that they have both IPO'd and have far from tanked. They are both in business with no apparent sign of bankruptcy etc.
You make them look bad by comparing them to the biggest tech successes(such as Google). The thing is, you can make vast majority of companies look bad in comparison to Google. But that misses an important point about public markets: there is plenty of room for non-googles in the stock market.
"Overall you seem very down on Zynga and Groupon. Note that they have both IPO'd and have far from tanked. They are both in business with no apparent sign of bankruptcy etc."
It's not about bankruptcy. As you say, both Groupon and Zynga will likely continue as profitable businesses for the foreseeable future. But the IPO valuation isn't determined by their ability to stay in business; it's based off their ability to grow. The P/E ratio is close to 80 (Google's is ~20). That means the company is expected to increase earnings dramatically. Do you see that happening? All the data looks like they're plateauing or even trending down. Unless they have something innovative in the pipe, the stock isn't worth the money.
It's not about bankruptcy. As you say, both Groupon and Zynga will likely continue as profitable businesses for the foreseeable future. But the IPO valuation isn't determined by their ability to stay in business; it's based off their ability to grow. The P/E ratio is close to 80 (Google's is ~20). That means the company is expected to increase earnings dramatically. Do you see that happening? All the data looks like they're plateauing or even trending down. Unless they have something innovative in the pipe, the stock isn't worth the money.
For those who have no idea (like me) about what investing in tulips in 1630s looked like here is a link - http://en.wikipedia.org/wiki/Tulip_mania
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People bitched about Google's owners taking ridiculous control, and doing and an interview with Playboy. Google IPO'd at an absurdly low price (less than half of my bid). Google's IPO was the most underpriced offering in modern history. I think $9.50 is generous for Zynga. Zynga is a declining business.
I think you are right, but for the wrong reasons. Facebook will ultimately be only marginally profitable for the same reasons as Zynga. I value Facebook at $20B.
I think you are right, but for the wrong reasons. Facebook will ultimately be only marginally profitable for the same reasons as Zynga. I value Facebook at $20B.
Karma?
I and many others would probably like to say to Pincus "Karma is a bitch" but I'm sure him becoming a billionaire, despite the lackluster response from the market, would make that point kind of moot.
He's got a few billion in the bank, so I'm guessing not.
Wouldn't it be great if capitalism worked that way.
But, but, we're in a bubble!
Are you implying that this underwhelming IPO somehow signifies that there is or was no bubble? That messes up cause and effect: Zynga's IPO results don't determine the bubble, the bubble brought us the Zynga IPO.
Why would it require a bubble for a fast-growth company with hundreds of millions in revenue to IPO?
"Zynga's near $9 billion valuation is less than videogame maker Activision Blizzard Inc's $13.6 billion and higher than Electronic Arts Inc's $6.7 billion. In the last four quarters, Activision and Electronic Arts generated more revenue than Zynga."
Activision just brought in $1 billion for one game, and EA Just sold 10 million of it's flagship title, while both their markets are expanding.
I think the value of social network based games has been somewhat inflated.