Zynga's IPO halo

Zynga's close relationship with Facebook could potentially provide a handy halo effect that will attract investors, despite its social network peers riding a rocky post-listing path.

Online gaming platform Zynga is set to go public in two weeks and the company is apparently taking steps to ensure that its IPO doesn’t follow the same route as the one traversed by Groupon and Pandora.

The first step in that strategy has seen Zynga cut its valuation from $US14.05 billion to $US9 billion and it looks like the company is also planning to offer a greater share of its stock to the public.

According to a regulatory filing to the SEC, Zynga is aiming to offer 100 million shares, or about 14.3 per cent of its total, priced between $US8.50 and $US10.

That’s more than double of the 5.5 per cent Groupon offered to the public and the action would suggest that Zynga has been keeping a close eye on the shares of Groupon and Pandora, both of which made a stellar debut but have since seen a precipitous decline in their share price.

Online local coupon site Groupon debuted as a publicly traded stock in early November valued at $16.5 billion, but has since fallen 40 per cent to about $10 billion. Groupon shares are trading around 22 per cent weaker, while Pandora’s stock has sunk 32 per cent since its debut in June.

Their downhill slide coupled with volatile market conditions makes it a tough time for any tech IPO but Zynga does have a couple of aces up its sleeve which set it apart from the likes of Groupon and Pandora.

The most important of these is that Zynga actually makes money. The company posted an 80 per cent rise in third quarter revenue of $US306 million, with net income of $US12.5 million.

However, profits have been weighed down by increased overheads and reduced sales. Zynga’s quarterly profit fell more than 50 per cent to $US12.5 million and year-on-year profits have fallen from $US27.2 million to $US1.3 million, a drop of around 95 per cent.

You would think that tumbling profit figures are not a good look on the eve of an IPO but the truth is that Zynga is still in the black and investors will appreciate that.

The other thing to remember is that Zynga’s FarmVille is a bonafide social gaming phenomenon and is one of the biggest things on Facebook. The game has over 39 million active users, and achieved record revenue in the March quarter.

Zynga's use of Facebook's existing platform essentially allows it to bypass the retail channel by which offline games reach consumers and the company’s close relationship with Facebook could potentially provide a handy halo effect that will attract investors. On the flipside, it does leave the company tethered to the fortunes of the social network.

When Zynga goes public on December 15, it will be the first company to do so on the back of digital goods. The company doesn't actually make anything. It creates digital games, and then sells items within those games to make money.

It is also the vanguard of the social gaming phenomenon that is expected to grow 20 per cent in the next two years and if the company is successful in raising $US1 billion in two weeks time, and more importantly its shares manage to avoid the fate that has befallen Groupon and Pandora,  then there might be some genuine Christmas cheer as far as tech IPOs are concerned, paving the way for the much anticipated Facebook IPO next year.