Five Reasons Zynga Shouldn’t Go Public Yet

Zynga has a sky-high implied valuation, and it could wind up being worth much more at IPO. There are, quite frankly, billions of reasons for the social gaming company to pursue an IPO. But, is now the right time? Zynga is in a unique situation, because of its growth plans, financial performance and reliance on another company (Facebook) for so much of its revenue. There’s a lot of hype around the company … and plenty of risk.

So, will the biggest name in social gaming be able to use its brand to beat the challenges before it? Well, word on the street is that Zynga is one of the few companies that could go public in today’s difficult market conditions, but that doesn’t necessarily mean it should. We’ve all heard our parents tell us that patience comes to those who wait. Let’s take a look at five reasons Zynga should heed this advice:

1. You can’t ignore the second quarter results: when your earnings fall around 95 percent year over year, people notice. And they tend not to be impressed. Zynga did go the second quarter without a big release, and the results reflect that. Unfortunately, Zynga makes its money on big releases, so it will have to develop a plan for addressing these gaps in the future.

2. The market is still ugly: there’s a reason so many IPOs have been pulled this year – the market sucks. High levels of volatility following the downgrade of U.S. sovereign debt in mid-August turned the best year for the IPO market since 2007 around completely.

3. Google Plus isn’t enough: Zynga appears to be dealing with its Facebook-dependency issues by diversifying into mobile and Google Plus. Unfortunately, this will probably take a while to put even the smallest of dents into the share of revenue Zynga derives from Facebook. For it to make a difference ahead of an IPO, Zynga would have to wait a (long) while.

4. Bigger upside: even if Zynga could go public in this market, it might be able to fetch a higher valuation by waiting until markets calm down a bit. As long as the company doesn’t need an additional capital infusion (as some argue Groupon may), putting off the IPO for a while could give Zynga time to build out its strategy, increase its profitability and stabilize the business a bit. In the end, it would see a much higher IPO valuation, effectively rewarding patience.

5. Facebook isn’t going public until sometime next year: until Facebook goes public, it will have a lot more flexibility. This could be problematic for Zynga. Once Zynga goes public, it will be at the mercy of public capital markets. If Facebook makes a decision that is detrimental to Zynga – which, as a private company, it will be able to do more easily – Zynga would be exposed to incredible risk. And investors probably wouldn’t be too forgiving. Also, it remains to be seen how early investors would perceive the nature of the Facebook-Zynga relationship ahead of an IPO.

 

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