Zynga Share Drop Damages Facebook Value

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Dan Berthiaume avatar

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Embattled Facebook stock, which has wavered in value since being released in a May 2012 IPO at US$ 38 per share, took another blow yesterday when the share price of social game provider Zynga dropped 40 percent to about US$ 3 in after-hours trading.

Zynga is the company behind the series of “Ville” games that can be played on Facebook, such as FarmVille and CityVille.

Experts Make Mixed Predictions for Longer-Term Effect on Facebook

Zynga, which receives 92 percent of its revenue from Facebook, reported a US$ 22.8 million net loss for the quarter ending June 30, 2012, compared to a roughly US$ 1.4 million net gain the quarter ending June 30, 2011. Following the release of these disappointing results, Facebook shares lost 6 percent of their value, hitting US$ 27.61 earlier this morning.

Although Facebook is expected to release its own second quarter fiscal results after the close of the market this afternoon, The Wall Street Journal cited a Piper Jaffray analyst who said Zynga only accounts for about 10-12 percent of Facebook’s total revenue, and its revenue losses may be due more to Facebook’s focus on new game discovery than on inherent weaknesses in Facebook as a revenue generating platform. However, The Wall Street Journal also quoted an Evercore analyst who said Zynga’s disappointing results may have a greater impact on Facebook’s financial standing.

IPO Results: So Far, Not So Good

Regardless of how Facebook’s second quarter results turn out, or whether today’s drop in share value turns out to be a blip or a more pronounced trend, there is no denying Facebook has had a bumpy ride since its IPO.

Learning Opportunities

Within a week of the IPO, various parties were reportedly being sued over what amounts to insider trading by Facebook and its IPO banking partners. Investors who weren't privy to the news that Facebook's revenue numbers weren't likely to be as good as hoped were unhappy they had bought and sold the shares with incomplete information.

And although since the IPO, studies have indicated Facebook mobile ads are proving popular with consumers, the company has been historically weak in terms of generating revenue from mobile advertising, and in fact never obtained any significant revenue from mobile advertising until launching its “sponsored stories” initiative in June 2012. And plans for targeted mobile ads may well create new negative publicity about user privacy concerns.

Despite its staggering popularity and incredible depth of valuable consumer data, Facebook is still in the process of proving its business model. Whether Zynga’s poor financial results prove to be a momentary distraction or a harbinger of things to come will depend on how the top management at Facebook positions the company as it continues its evolution from a way for Harvard students to find dates online.