Value of Zynga, Maker of Farmville and Mafia Wars, Plummets, Pulling Facebook Down with It

Things are not looking good for Zynga, the developer of popular Facebook games like Farmville, Mafia Wars, and Hidden Chronicles. At the close of the market yesterday, the value of Zynga stock had decreased by more than a third, to $3.18 a share, which likely led to a devaluation of Facebook stock, down eight percent after late trading yesterday. Zynga is doing no better today: at the close of the market, the value of Zynga is hovering around $3.17 a share. Shortly after the Zynga IPO that took place last December, Zynga stock was worth nearly four times as much.

There are specific reasons for Zynga’s most recent drop in value. The company’s second quarter revenue was lower than analysts expected, as were revenue forecasts for the rest of the year. The company was expected to make $1.47 billion in 2012, but now the company hopes to take in only $1.15 billion. Both surely contributed to Zynga’s dramatic drop in value yesterday.

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Perhaps of more concern, however, is the fundamental viably of the company’s business model. Most of Zynga’s games are free and have attracted millions of users who play through Facebook. The company makes money off only a small portion of these gamers, though. These dedicated users buy virtual goods, like more space for their farms in the game Farmville, but recently they have not been spending as much. The daily average that Zynga makes off their core users has dropped by 10 percent over the last year. Even if Zynga manages to attract more users, which they may be able to do by, for example, expanding in international markets, these new gamers will not necessarily increase Zynga’s earnings because they may not be inclined to buy virtual goods. Moreover, the number of Zynga’s daily active users has declined recently.

 

If Zynga makes less money, so too does Facebook. Facebook, which provides the platform upon which Zynga games are played, takes a 30 percent cut of all the money that gamers spend on virtual goods. The fact that Zynga gamers are spending less is a major problem for Facebook, as the money that the company pulls in from social games is one of its two main sources of the revenue. (The other source of revenue, of course, is advertising.)

 

Both Facebook and Zynga remain hugely popular, so at this point it is unwise to predict the collapse of either company, but the decrease in each company’s stock value since their IPOs is disconcerting to say the least. If you bought stock in either company soon after their IPOs, you’ve lost money, and that’s the bottom line at this point.

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