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Zynga’s stock price is up after Facebook IPO but will it stay up?

Written By: Serena Dai on February 2, 2012 No Comment

A screenshot of FarmVille, Zynga Inc.'s most popular game.

News of Facebook’s initial public offering has boosted Zynga Inc.’s stock price some 20 percent in just one session, after weeks of trading below its initial public offering price of $10 per share.

Investors initially feared the social gaming company was too dependent on social media site Facebook, which takes 30 percent of Zynga’s Facebook-earned revenue from popular games such as FarmVille. Now, Facebook’s filing shows that Facebook relies on Zynga, too: 12 percent of Facebook’s $3.71 billion sales last year came from Zynga.

It’s good news for Zynga investors, but unless the company can successfully leverage the numbers to gain more power with Facebook, Zynga may not be able to maintain the momentum.

When the 30 percent fee contract ends in May 2015, Zynga will have to show strength in negotiations to please investors, and the only way to do that is to wean off of the platform. Until then, Zynga’s revenue growth may not be able to keep pace with expansion costs associated with making more games and drawing in more users.

Zynga’s games are free – to attract more users and to maximize the social aspects of gaming, the company says. It makes most of its money by selling virtual goods through Facebook games. Like many Internet companies, Zynga spent its early years losing money. In 2008, the company lost $22.1 million, 2009: a $52.8 million loss. But by the end of 2010, Zynga had net income of $27.9 million.

Don’t get too excited yet—net income may have risen by about 150 percent, but it wasn’t because of sales. Those only went up by 4 percent. The biggest gain came from an influx of cash from investments and sales of stock; the actual number of paying users did not rise as much.

While the number of daily average users went up 37 percent to 56 million users in 2010 from 41 million in 2009, the average amount of money earned per user rose only 17 percent, to 4.1 cents from 3.5 cents, according to the company’s S-1 filing. Such a slowdown does not bode well. In the same period, Facebook’s revenue went up 154 percent while net income tripled.

To its credit, Zynga does boast more users and more daily active users than any other developer, according to AppData. If you think that social gaming is the future, Zynga’s the place to put your money. Though Zynga has recently gotten some flack for allegedly stealing game ideas, the most successful indie game developers are more likely to be bought out by Zynga than to become real competitors. (As of September 2011, Zynga had $787.7 million dollars in cash.)

And Zynga is trying to rely less on Facebook. As of publication time, three of the top 20 grossing apps on iTunes were created by Zynga. The company is also the creator of some online gambling games that use fake money, which it hopes to convert into gambling with real money,  it told Mercury News. The question is whether any of this boosts revenues enough to outpace expansion costs.  Investors and Facebook will be watching closely.

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