Friday, December 16, 2011

Zynga, Nexon Go Public

This week saw two big on-line gaming companies, go public with initial public offerings (IPO) worth over $1 billion.   U.S.-based Zynga, makers of Farmville, raised $1 billion with an IPO of 100 million shares at $10 each.  The Tokyo-based Nexon, creators of Maple Story, raised approximately $1.2 billion with a sale of 70 million shares at 1,300 yen, or approximately $16.90 per share. 

I know I've played too much Eve Online when I can draw a CCP analogy between the Icelandic space vikings and the two IPOs.  Zynga's Farmville invites a comparison to Eve's Planetary Interaction, especially the first iteration of PI which was a clickfest, just like Farmville.  Zynga reminds me of CCP CEP Hilmar Veigar Petursson before the launch of Incarna.  Way overconfident.  The $10 share price was at the top end of the predicted is potentially a disaster in the making for purchasers of the stock, with analysts already predicting a sharp drop in price. 
Arvind Bhatia, an analyst at Sterne Agee, played the roll of bitter vet and placed a "sell" rating on Zynga stock before the stock begins trading on NASDAQ today.
“'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,' the analyst wrote in a note to clients Tuesday.
“'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.'”
Nexon, the company CCP has hired to bring Eve Online client to the Japanese market, on the other hand plays the role of Hilmar after the Summer of Rage and bases its price on reality.  The price reflected a price to earnings (P/E) ratio of 17:1, which while a bit high, is reasonable.  The price slipped 2.3% on the first day of trading on the Tokyo Stock Exchange down to 1270 yen, but analysts are positive.  The Wall Street Journal reported that:
"Deutsche Securities initiated Nexon at Hold with a Y1,400 target price, saying that while shares have already largely priced in current growth, expansion onto smartphone and social networking site platforms will be a key point going forward."
And according to one analyst explained the first day price drop this way:
"'Part of the problem is that they priced it at fair value, so it wasn't going to come on at a huge premium,' said David Gibson, an analyst at Macquarie Capital Securities in Tokyo, also noting some Nexon shareholders were allowed to offload their holdings immediately."
So we have two game companies, one that is over-hyping itself looking to cash in on its main product before the buzz goes away and the other trying to base its business on reality.  The situation really does sound like CCP in 2011 to me.

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