Zynga IPO Goes Cold: Danger for Video Game Stocks?

(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)

IPO-hopeful Zynga just submitted an expanded S-1 filing revealing new third-quarter data, but as Julia Boorstin ofCNBC points out, the 500 additional pages of data fail to include one key data point: a stock price.

An S-1 is a U.S. Securities and Exchange Commission filing that contains basic business and financial information often used by investors (especially in the case of IPOs) to evaluate a public company.

 

Expect Long Delays

Zynga’s lack of stock price information is intriguing. Speculation, aided by the S-1 third-quarter data, is that Zynga is not getting the kind and level of investor interest they hoped for. And although the IPO scheduled to start next week has been delayed, investors now predict the stock will remain delayed until early 2012.

Zynga’s hesitation to launch the IPO can be partially attributed to the murky conditions of IPO market. Although Groupon dove in last week, analysts are not in agreement of how it will play out. Emma Bazilian of Adweek reports that “Groupon is drawing more attention than ever from investors, venture capital firms, and tech startups that view the company as a bellwether of future public offerings.” You can bet Zynga is paying close attention.

 

The Filings

Additionally, Zynga’s filings show a mixed bag of third-quarter results that could leave would-be investors hesitant to jump in. Julia Boorstin reports:

Third quarter revenue of $306.8 million is up 80 per cent from the year-ago quarter, revenue per unique user grew 30 per cent year-over-year and daily active users grew 10 per cent year-over-year after three successive quarters of year-over-year declines.

But there’s plenty of negative news in this filing for investors to chew on: net income is down 50 per cent from the year-earlier quarter to 12.5 million dollars. And growth this year seems to be slowing — revenue growth from Q1 to Q2 was 15 per cent, and only 10 per cent from Q2 to Q3. Plus daily active users dropped 8.5 per cent from the second quarter to the third quarter, to 54 million.

Another surprising revelation about the number of people who are paying to play. The company counts just 6.7 million people, less than 3 per cent of its 230 million monthly users — as “paying” users (this excludes some payers on mobile platforms and those who use smaller web-based payment methods). Not only is this percentage quite low, it’s also lower than the “less than 5 per cent” Zynga said in previous S-1 filings.

 

Can Zynga’s profitability be representative of the gaming industry?

It’s interesting that Zynga’s third-quarter data shows a disappointingly low level of paid users. It raises a question about the success of other mobile gaming sites. They have surely become very popular, but in an age where competition is ripe and “free” is the key word consumers are looking for, how profitable can these companies be?

We were wondering, what does that mean for other mobile gaming stocks? And more broadly, what does it mean for the video game industry?

Investing Ideas

Worried about Zynga’s IPO, and the potential impact on the video game industry?

Well, we’ve found several examples of rallying video game stocks that should ease your concerns.

Below we list the top six best performing video game stocks over the last year. Considering the weak demand for Zynga’s IPO, do you think these gains are sustainable?

analyse These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. visualise annual returns for all stocks mentioned

List sorted by annual performance.

1. Glu Mobile, Inc. (GLUU): Engages in the design, marketing, and sale of casual and traditional mobile games worldwide. The stock has gained 102.31% over the last year.

2. Konami Corp. (KNM): Develops, publishes, markets, and distributes video game software products for stationary and portable consoles, as well as for use on personal computers. The stock has gained 75.51% over the last year.

3. Electronic Arts Inc. (ERTS): Develops, markets, publishes, and distributes game software and content for video game consoles, personal computers, mobile phones, tablets and electronic readers, hand held game players, and the Internet. The stock has gained 54.22% over the last year.

4. Take-Two Interactive Software Inc. (TTWO): Develops, and distributes interactive entertainment software, hardware, and accessories worldwide. The stock has gained 42.86% over the last year.

5. Activision Blizzard, Inc. (ATVI): Activision Blizzard, Inc. publishes online, personal computer (PC), console, handheld, and mobile games of interactive entertainment worldwide. The stock has gained 21.83% over the last year.

6. International Game Technology (IGT): Designs, manufactures, and markets electronic gaming equipment and systems worldwide. The stock has gained 8.47% over the last year.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


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