It was not a promising start for the newly public Zynga (NASDAQ:ZNGA). On its IPO debut, the stock ended the day at $9.50, which was 5% below its offering price. It traded in a range between $9 and $11.50.
Of course, this really looks like a continuation of the past few months, as Zynga’s valuation has seen a steep drop since the summer. At that time, the company estimated its market value at about $24 billion. Now it’s about $8.5 billion.
But keep in mind that many social IPOs have taken a hit lately, as seen with the chart below:
But Zynga’s value deflation might be more than just a general bearish sentiment for social stocks. Many fear the company might have a tough time continuing its strong growth rate. And there already are signs of deterioration. From the first quarter to the third quarter, Zynga’s daily active users went from 62 million to 54 million; the company’s peak was 67 million in the second quarter of 2010.
One reason for the falloff is that Zynga is not creating hit games like it used to, and seems unable to replace hot titles like Mafia Wars, CityVille and FarmVille. What’s more, Zynga now has a variety of strong competitors, such as Electronic Arts (NASDAQ:ERTS), whose Sims Social has turned into a big hit.
If the drop in DAUs continues, it certainly could dampen Zynga’s revenue growth. Consider that less than 3% of Zynga’s audience pays any money (this is for virtual goods, such as buying picks or energy pills). The company also gets more than 95% of its revenues from Facebook. As a result, Zynga is required to pay a whopping 30% to the social network for all digital transactions, which is part of a five-year contract.
The challenge for Zynga is to find non-Facebook opportunities, such as on mobile devices, or even getting traction from its own independent gaming platform (see my interview with CrowdStar’s CEO). However it happens, it’s going to take some time for this to play out. In the meantime, it’s probably best to stay away from the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.