Zynga’s Stock Nosedives, Falling Nine Percent to Hit New Low

Zynga’s shares continued a downward spiral for a third straight day, sinking more than nine percent today to hit an all-time low.

At one point today, the stock dipped as low as $7.97 a share before closing at $8 even.

At that price, it is $2 below it’s initial stock price of $10, and has lost at least 20 percent of its market value in less than a month.

But why?

The San Francisco social games company has launched at least two new games since going public, and over the past few days, no harsh analyst report has come out with a negative rating.

It appears the once high-flying Silicon Valley company — known for addictive games on Facebook like FarmVille and CityVille, and mobile games like Words With Friends — is having a hard time gaining the market’s confidence.

To be sure, there’s no clear answer for the price drop; and other tech companies that recently went public, such as Groupon or LinkedIn, have experienced their own fluctuations. But there is one theory making the rounds.

Analysts and other sources suspect Zynga’s stock has been propped up over the past month by the underwriters, who agreed to buy shares if the stock started to perform poorly. The stock purchases would have created steady demand for the stock and kept the price relatively stable.

Furthermore, the theory goes, the underwriters have since met their obligations for buying the stock, and therefore are are no longer buying as many shares.

Incidentally, on Friday, Morgan Stanley — one of Zynga’s underwriters — disclosed that it had purchased nearly 16 million shares in December.

But while the disclosure, filed with the with the Securities & Exchange Commission, adds fuel to the theory, it is unclear if those shares were purchased as part of the IPO, or if they were spread out throughout the month.

Zynga declined to comment, citing its quiet period.

Still, whatever the reason for the drop, Zynga’s shares are seeing less demand.

As recently as last week, the stock was trading at $9.45 a share, but since then, it has struggled to stay above $9. On Friday, it lost 12 cents; today, it lost 81 cents, or 9 percent.

But even if the underwriting theory is on the mark, it doesn’t explain the broader question of why Zynga’s stock price is falling. Shouldn’t there be other investors who are willing to buy up a piece of Zynga?

Unfortunately, it seems the market isn’t sure what to do with the stock, or how to value it.

A social games company fits somewhere between traditional game makers, like Electronic Arts and Activision; and an Internet stock, like Google or LinkedIn.

Zynga gives away its games for free, but still manages to be profitable from selling virtual goods, such as a tractor or more power-ups, that a small number of players elect to purchase inside the games.

It’s also heavily reliant upon Facebook, which could be another problem. Facebook, too, operates privately, and reveals only as much information about its business as it has to — at least until it files to go public, which could be later this year.

In all likelihood, many of these investor fears could be settled when Zynga reports its first period as a public company. No word on when that will be yet, but the fourth-quarter report should come as soon as this month, and no later than February.


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— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik