Gamemaker's dependence on Facebook could be problem

Social-network gamer Zynga saw its stock slump 5% on Friday, its first day of trading, to close at $9.50, an unspectacular debut for a company that’s a leader in its space with the three biggest games on Facebook, “CityVille,” “CastleVille” and “FarmVille.”

The shares fell another few cents in late trading. The overall market’s been cranky, and some analysts worry about Zynga’s near total dependence on Facebook, where it generates more than 90% of its revenue. But others say it’s one of the few ways to play Facebook as an investor, at least until the giant social network goes public itself likely sometime next year.

Fans of Zynga, founded in 2007 by Mark Pincus, also like its business model and prospects.

“Unlike TV, social games can be played anywhere on the planet that you have Internet access,” said Richard Greenfield of BTIG, who initiated his coverage of Zynga with a buy rating. He sees the company launching more games across more platforms. It’s especially well placed to promote new games through its current ones.

Post IPO, Zynga’s got cash to invest in its business. The shares were priced at $10 for the initial public offering, bringing in more than $1 billion in fresh capital.

Greenfield estimates revenue could rise from $1.17 billion this year to $1.5 billion in 2012 and $1.7 billion in 2013.

Naysayer Arvind Bhatia of Sterne Agee started coverage with “underperform” on fears that growth is slowing and the stock could fall to $7. Flagship game “FarmVille” has peaked, he said, and the other titles are coming online at a much slower pace.

Other top games include “Mafia Wars” and “Zynga Poker.” The games are all free; the company makes its money mostly from advertising and sponsorships and through in-game virtual purchases. Its IPO material said it has an average of about 230 million active monthly users.

“I think it’s a great company and brilliant in many respects,” said one media investor. “But they do have a problem with dependence on Facebook, and that they always need new games to attract attention” — an issues all gamemakers face.

He’s also not a fan of the various classes of stock, with super-voting shares and control firmly in the hands of insiders.

Describing itself on its own website, the company says, “Zynga wants to give the world permission to play. Every day, we connect people on seven continents and deliver a dose of don’t take yourself so seriously.” It hopes Wall Street will.

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