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Behold the Zynga Death Spiral!

ZNGA shares down 60% since March; where's the bottom?


Two months after its IPO, social gamemaker Zynga (NASDAQ:ZNGA) was the toast of Wall Street thanks to a 50%-plus run-up in its shares.

Then March happened. Starting early that month, Zynga began what has become a nearly 65% decline, including a recent acceleration into an all-out free-fall. Shares now are down around the $5 mark — well below its IPO price — thanks to an 11% decline by midday Tuesday.

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What in the heck happened?

Well, the most obvious culprit is the horrendous IPO of Facebook (NASDAQ:FB). The dud quickly helped investors drop their fascination with social stocks and killed the illusion of unchecked growth. After all, if a marquee name like Facebook has problems, then others — especially those that somewhat rely on Facebook — must be in even more dire straits, right?

And that’s the case with Zynga. Facebook is the biggest source of Zynga’s revenues, and the social network’s growth has slowed, as pointed out in a Wall Street Journal report out today. Facebook saw just a 5% increase in the U.S. for unique visitors, to 158 million. This compares to 24% growth in the same period last year and 89% in 2010 — a slowdown that was inevitable as Facebook reaches saturation.

No doubt, these trends have had a negative impact on Zynga. According to Cowen & Co. analyst Doug Creutz, the company has seen drops in daily active users for all its major games. The month-over-month drops were more than 20% for titles like CityVille, Hidden Chronicles and Empires & Allies.

True, Zynga makes its money from the sale of virtual items from a small number of users. But according to the company’s S-1, the DAU metric is highly correlated to monetization.

Still, another big issue is at play: mobile. Zynga’s Facebook-native games are not transferable to this fast-growing platform, and as a result, Zynga has had to develop new games for mobile that have had mixed results.

Even acquisitions have proved futile, as seen with the $180 million-plus deal for OMGPOP. Since the acquisition, the DAUs for Draw Something have plunged.

The recent trading looks like a capitulation, so an optimist might think Zynga’s shares soon will find a bottom. However, Zynga has few interesting games down the pipeline — and with no catalysts, there’s little reason to think the stock will make a move to the upside.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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