Zynga Downgraded Before IPO

Is Zynga cheap or an accident waiting to happen?

You can’t even buy the stock yet but the analysts at Sterne Agee are wasting no time in telling you not to ahead of the company’s massive IPO (coming Thursday).

John Melloy shot this over to me and I just had to share it, you almost never see something like this…

Ahead of Zynga’s (ZNGA) expected IPO pricing this

week in a range of $8.50-$10.00 per share, we are initiating coverage

with an Underperform rating and target price of $7, based on a healthy

11x EV to EBITDA (2012E) multiple, which is a 30% premium to its

peer group. While we believe in the potential for social games, we

think Zynga’s growth is slowing even faster than what is obvious at

first, its margins are under pressure, and free cash flow has been

declining recently; thus we believe the implied valuation in the IPO is

not justified.

The Bottom Line. Farmville, the company’s flagship title which

helped generate hyper-growth in the past, has peaked and the other

titles are coming on line at a much slower pace. Cityville, currently

Zynga’s best title in terms of traffic, is tracking, by our estimates, 50%

below Farmville at the same point in its history. Castleville (released

11/15), the new title in the “Ville” series, is averaging DAUs 50%

below Cityville at the same point. The picture with Mafia Wars 2

(released in early October this year) appears quite dismal with DAUs

having already declined to less than 1M from 28M reached 2 weeks

after launch. This also implies, perhaps, that sequels in social gaming

are not a guaranteed success.

Not a pretty take on a company seeking an initial valuation of $9 billion.

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