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Zynga Has Been a Losing Game for Investors

The Exchange
In this June 26, 2012 photo shows Zynga CEO Mark Pincus walks off the stage after an announcement of new games at Zynga headquarters in San Francisco. Not long ago, online games company Zynga looked on pace to unseat much bigger, well-established rivals as it rode the popularity of "FarmVille," the clicking game of virtual cows and real money. But the iPad came along, and more people bought smartphones. People weren't playing Zynga's games on Facebook and computers as much as they used to. Zynga's revenue growth slowed down, and its stock price fell sharply, even as it released dozens of new games. Now, the out-of-luck game maker is turning to a "FarmVille" sequel, released on Wednesday, Sept. 5, 2012, for a revival. (AP Photo/Paul Sakuma)

As tech titan Apple's (AAPL) ipad unveiling was happening in San Jose, Calif., on Tuesday, employees of another, very different, tech company were receiving pink slips. Zynga (ZNGA) yesterday cut 5% of its workforce -- or 15o people -- in a move that was hardly surprising for the beleaguered social gaming company, especially following the slashing of its 2012 outlook earlier this month. The cuts came ahead of Zynga's 3Q earnings release, which is scheduled for after the bell Wednesday.

The San Francisco-based company will also be putting 13 older games to rest and will pull back on its investment in its latest game "The Ville"; it also shut its Boston office and may also be looking toward shuttering its operations in Japan and the UK (the company outright owns its San Francisco headquarters, having purchased the building for $220 million earlier this year). This speaks to a much different strategy for Zynga than what they came out of the gate with -- expansion, acquisition, spending. But its failed OMGPop buy, which led to a $90 million writedown that killed almost half the deal's value, certainly helps point to the need for a new plan.

Zynga shares, which closed down 5% on Tuesday, were up close to that much in a post-market boost following confirmation of the restructuring news and surprisingly strong earnings from partner Facebook (FB), and they were up earlier in the day on Wednesday. But by the end of the day, the stock had skidded to an all-time low of $2.12. And of course, since its IPO in December, shares have shed a whopping 78% of their $10 offer price.

No Fun and Games

No, it hasn't been fun and games for the folks at Farmville, and now even Facebook is sounding disenchanted. On its earnings call Tuesday night, CEO Mark Zuckerberg was decidedly negative on Zynga, noting that gaming was not doing as well on the site as they would like and pointing to a steady decline in Zynga-generated revenue:  "Including its ad spend, Zynga comprised 7% of our total revenue this quarter, down from 10% in Q2 and 12% in Q3 last year." So even though Zynga still might have plenty of users, these users are less willing to shell out real money to buy fake farm animals or tokens for such offerings as Scramble With Friends.

Zynga's 2Q earnings were a huge disappointment back in July amid delays in new game releases, a difficult shift to mobile, a disappointing performance for game offerings such as "Draw Something" and less play from Facebook's massive audience given the social networking giant's interface changes. Earnings consensus from analysts for this evening's report stands at $-0.01 earnings per share on $256.43 million in revenue; the high range for EPS puts earnings at $0.1 per share and for revenue the high estimate is $311 million. Since so much bad news has already been reported ahead of earnings, it may mean there will be no major blows after the bell.

So what's next for the troubled company? A leaner operation could help boost its performance but social-gaming fatigue could also increase among a formerly Mafia Wars-obsessed populace. With a $1.7 billion market cap and cash on hand almost equal to that, the time might be ripe for a takeover of Zynga, but Pincus has been quoted as saying he would never consider a sale, and early-summer buzz about Facebook possibly snapping it up has yielded nothing of the kind so far.

Meanwhile, Zynga currently stands as No. 2 on the list of the worst IPOs of the past year, topped only by Digital Domain (DDMG), the special-effects outfit that emerged from Chapter 11 bankruptcy at the end of September. Here is our updated list of the worst -- and best -- IPOs of the past year, by return on offer price.

Ticker Symbol Offer Date Offer Price Total Return
Digital Domain Media Group (DDMGQ) 11/18/11 $8.50 -93.5%
Zynga (ZNGA) 12/15/11 $10.00 -78%
Groupon (GRPN) 11/3/11 $20.00 -77.6%
Envivo (ENVI) 4/24/12 $9.00 -75.8%
CafePress (PRSS) 3/28/12 $19.00 -71.2%
Ticker Symbol Offer Date

Offer Price

Total Return
Michael Kors Holdings (KORS) 12/14/11 $20.00 175%
National Mortgage Holdings (NSM) 3/7/12 $14.00 149%
Supernus Pharmaceuticals (SUPN) 4/30/12 $5.00 145.4%
Guidewire Software (GWRE) 1/24/12 $13.00 130.3%
Annies (BNNY) 3/27/12 $19.00 116.7%
Source: Renaissance Capital.