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

BOSTON ( TheStreet) -- Zynga ( ZNGA - Get Report) 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 - Get Report) 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.

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"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 - Get Report), Activision-Blizzard ( ATVI - Get Report), Take-Two Interactive ( TTWO - Get Report) 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.

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