Zynga Shares Slip Slightly as Company Raises $1B During IPO

Zynga’s shares hovered near their opening price at $10 as the company raised $1 billion in its initial public offering. It’s a momentous day for the San Francisco-based company and the entire social gaming industry as Zynga is now worth about $7 billion after being founded four years ago.

Shares opened at around $11 when the company started trading on NASDAQ around 11 a.m. Eastern, but are now at $9.65.

Long derided by more traditional and console-focused gaming companies for building casual, free titles on the Facebook platform, chief executive Mark Pincus built a company that is poised to gross more than $1 billion in revenues this year. Yesterday, the company priced its shares at the high end of the original $8.50 to $10 range it proposed two weeks ago. It sold 100 million shares of Class A stock, which have the lowest voting power of the three different kinds of shares it has in its financial structure. The other two classes of stock hold 98.2 percent of the voting power.

Zynga’s IPO is just the beginning — not the end — of a four year journey that helped legitimize both the Facebook platform and the virtual goods-oriented revenue model. Zynga made $30.7 million in net income on $828.9 million in revenue through the third quarter of this year, up from $401.7 million in revenue during the same time a year earlier.

The question now is what Zynga can do to keep up its rate of growth at time when it has saturated the Facebook platform. Daily active users have declined for two consecutive quarters and margins have also declined as Facebook coerced developers to use its platform currency, Credits, giving it a 30 percent revenue share. It has also cut back dramatically on viral channels since 2009, hurting growth for game developers.

Zynga’s net income has also declined from last year’s $47.6 million as the developer invested in research and development for new games. That trend may continue well into 2012; for example, Zynga expects to spend about $50 to $70 million this quarter on network infrastructure.

The company does have a few cards up its sleeve, however. Pincus said in an investor meeting last week that the company could probably double the number of paying players from 3.4 million out of 152 monthly unique users in the third quarter.

When Zynga posted a 30-minute video of its roadshow a few weeks ago, the company also emphasized that Zynga’s games tend to peak in revenues long after they’re launched. They pointed to FarmVille, which reached a peak in bookings about two years after it was released. Coupled with the fact that the last six months have been a busy launch period, Pincus says this lays the groundwork for near-term growth even as daily active users have declined for two consecutive quarters.

In addition to CastleVille, Zynga has recently launched Dream Zoo and ForestVille on mobile. The company has reached 13 million daily active users on Android and iOS, which is about one-quarter of its total usage every day. That suggests that Zynga may be able to reduce its dependency on Facebook, where it earned 93 percent of its revenue in the most recent quarter.