This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Zynga Shares Get Panned By Analyst Before IPO

Story updated with Bhatia's other calls, Jive's IPO success.

BOSTON (TheStreet) -- Zynga (ZNGA) shares won't begin trading until Friday but one analyst is already telling investors to sell shares of the social media gaming company.

Zynga, with has created Internet-based games like Farmville and Mafia Wars, will price its initial public offering later this week with an expected range between $8.50 and $10. That would put Zynga's IPO around $925 million, making the social media gaming giant the largest U.S. Internet company since Google (GOOG) raised $1.7 billion when it went public in 2004.

Zynga announced plans for the biggest Internet IPO since Google this week.

But before the IPO has even been priced, Sterne Agee analyst Arvind Bhatia panned the stock, initiating coverage of Zynga with an "underperform" rating and a price target of $7, arguing that the company's implied valuation is "not justified."

"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," Bhatia writes in a research note Tuesday. "Thus we believe the implied valuation in the IPO is not justified."

Bhatia's bearish view is based on the idea that Farmville's hyper grwth has peaked and that the company's other titles are coming on line at a much slower pace. Bhatia also notes that the sequel to Mafia Wars was "quite dismal" with daily active users (DAU) falling to less than 1 million from 28 million around its launch in October.

Top Videos of 2011


"Another bear argument is that Zynga is overly dependent on the Facebook platform (94% of revenue is generated on Facebook)," Bhatia writes. "A slowdown or disruption in the growth of Facebook, or Facebook policy changes, will negatively impact Zynga (and it did in 2010)."

Bhatia also notes that the barriers to entry in social gaming aren't that high, and that only a very small number of actual players generate all of the revenue, which makes Zynga even more vulnerable.

Bhatia's coverage universe doesn't include other social media companies, although he does follow several video game-related companies. Among them, Bhatia has "buy" ratings on GameStop (GME), Activision-Blizzard (ATVI), Take-Two Interactive (TTWO) and Electronic Arts (ERTS). He has a "neutral" rating on THQ (THQI).

When Zynga debuts this Friday, investors will be expecting much more than Bhatia does, especially considering the success of Jive Software's (JIVE) IPO. Jive sold 13.4 million shares at $12 a share, above the expected range. Shares of Jive rallied as much as 38% after their debut Tuesday.

Based on Bhatia's price target, though, Zynga shares would fall 17% to 30% after their debut. Investors will now have to decide whether the Word With Friends creator is worth the risk.

-- Written by Robert Holmes in Boston.



>To contact the writer of this article, click here: Robert Holmes.

Readers Also Like:


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,915.07 -70.54 -0.42%
S&P 500 1,964.68 -8.15 -0.41%
NASDAQ 4,396.2040 -22.83 -0.52%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs