OopsVille. Was Zynga's IPO a mistake?

After two days on the market, the social gaming giant has seen its stock fall around 10 percent. And some analysts expect that there's quite a bit of floor below today's closing.

Daniel Terdiman Former Senior Writer / News
Daniel Terdiman is a senior writer at CNET News covering Twitter, Net culture, and everything in between.
Daniel Terdiman
3 min read
Zynga has seen its stock price drop from its IPO pricing of $10 to around $9 after two days. But it is not the only tech IPO to struggle this year. Zynga

If Zynga thought it could get investors to flock to its stock the way Facebook users have rushed to FarmVille, CityVille, CastleVille, and others, it's getting a very unwelcome reality check.

On Friday, with the whole world watching and expectations high, the social games giant kicked off its IPO. But within hours of the shares going on sale at $10 apiece, it became clear that Zynga was in for a rough day. Though it finished the day with a market capitalization of over $2.5 billion, the shares had dropped to $9.50.

Today, things haven't gone any better. Though Wall Street initially bid Zynga up to $9.60 this morning, the stock was at just $9.02 when the closing bell rung. And while the market was down across the board, Zynga's fall was steeper than most. The Nasdaq was off 1.26 percent, and the NYSE 0.84 percent, but the social games company plummeted by comparison, ending today 5.05 percent down.

Of course, there are those industry observers who are less than surprised by Zynga's slow start out of the gate. Several analysts had targeted the company at far less than $10 a share, and it would seem that their estimates may be more realistic than those who came up with the stock's initial pricing.

On the other hand, companies fresh off IPOs have a well-established history of underperforming, writes Marketwatch. "According to Jay Ritter, a finance professor at the University of Florida and one of academia's leading experts on the IPO market, the average IPO over the last five decades has lagged the market over the first several years of being publicly traded," Marketwatch wrote. "In fact, according to Ritter, more than 10 percent of the months since 1960 have seen the average IPO close down on their first day of trading."

To be sure, though, not all IPOs go sour. This year, for example, the share prices of at least three tech companies that went public are above water. Leading the pack is LinkedIn, which went public at $45 and now sits at just over $65. Groupon, which has not had quite the impact on Wall Street some had hoped, is still above its IPO price: It came on the market at $20, and is at $22.38 today. And Zillow went public at $20 and is now at $22.70.

Others haven't fared so well. Pandora hit Wall Street at $16, and was at $10 today, and Demand Media has had the worst time of it, going IPO at $17, and coming in this afternoon at $6.74.

By comparison, Zynga is only barely scuffling. But people like Morningstar analyst Rick Summer think there could still well be a lot of floor below the social gaming company's stock price. In a report issued prior to the IPO, Summer wrote that Zynga is risky because just 1.5 percent of its users account for most of its revenues, because its competition is intensifying, and because it depends greatly on its warm relationship with Facebook.

"Our fair value estimate [of Zynga's stock] is $6.00," Summer wrote. "We don't believe the company exhibits an economic moat given our concerns regarding lifetimes of both Zynga game titles and their uses. Further, we question Zynga's ability to sustain bookings growth, particularly as competition intensifies and as gamers increasingly engage with smartphones and tablets, where the firm has been less successful."