This year's crop of "Web 2.0" IPOs has been much maligned by investors. According to the CAPS ratings from our stock-picking community, all six of those IPOs receive the minimum one-star score. By at least a 2-to-1 margin, CAPS members have predicted that they will underperform the market. Though the majority of those companies are still in the red or barely profitable, one debutante has been leaving them in the dust.
We built this city
Zynga (Nasdaq: ZNGA ) , the social gaming leader and maker of games like FarmVille, CityVille, and Mafia Wars, launched in 2007, but is already putting up healthy numbers. The gamer currently posts a trailing-12-month profit margin of 7.19% on revenue of $1.02 billion. For a comparison, let's look at some of the other recent IPOs:
Profit Margin (TTM)
|Zynga||2007||7.19%||Electronic Arts, Activision Blizzard|
|Groupon (Nasdaq: GRPN )||2008||(40.89%)||Google, Amazon.com|
|Pandora (NYSE: P )||2000||(3.89%)||SiriusXM, Spotify|
|LinkedIn (NYSE: LNKD )||2002||2.36%|
|Zillow (Nasdaq: Z )||2004||(0.55%)||HomeGain.com|
|Angie's List||1995||(65.51%)||Yelp, Google|
Source: Yahoo! Finance. TTM = trailing 12 months.
Looking at the chart above, Zynga is not only the most profitable, but the youngest of the bunch after Groupon. I'd rather see a quick rise to profitability than the slower path that LinkedIn or Pandora, which reported positive net income in its most recent quarterly report, have taken. I also like that Zynga is not competing with Internet heavyweights like Google, Facebook, or Amazon. Just as LinkedIn has created a niche for itself in professional social networking, so has Zynga established itself in social gaming as a first mover and top dog, as rivals Electronic Arts and Activision Blizzard mainly compete for console-based games.
Don't hate the player
It may be easy to mock games like FarmVille, but they've doubtless found an audience. Some users have even become addicts -- a Facebook group for FarmVille addicts has more than 10,000 likes -- and a Bulgarian minister actually lost his job over his FarmVille habit.
The international appeal and accessibility of social gaming is just one of its advantages over console-based games. Benefits also come from network effects as users get their friends to join, and the growing membership adds value to the games. Another reason I like this kind of business is that it's essentially recession-proof. Gaming is an easy escape from woes like unemployment, and the freemium model (games are free but upgrades cost money) is a more appealing offer for a casual gamer than having to go out and buy a console and game cartridges.
Just 20% of social gaming revenue comes from direct advertising, but EA Games has recently partnered with Dunkin' Brands in a modern form of product placement in which Dunkin' is offering in-game products and gifts. Though Zynga's user growth has slowed, product placement looks to be a growing source of revenue in the future. Ads come in three forms: banner ads, video ads, and product placement, with product placement potentially being the most lucrative, as deals are sometimes worth in the range of half a million dollars. The possibilities include branded in-game goods like a storefront, or branded in-game quests where the user could perform a certain task for a business -- delivering a FedEx package, for example.
But don't hate the game, either
Some critics have dismissed Zynga for its dependence on Facebook, but I see this more as business savvy, recognizing a new opportunity. Its mission statement states that the company was founded on the idea that "play -- like search, shop, and share -- would become one of the core activities of the Internet." It's hard to argue with that assertion. Zynga now has 227 million monthly average gamers.
Mobile appears to be the next frontier in social gaming, and no single business wants to be overly dependent on one partner, but Facebook, like Google, is a natural hub for other businesses to grow out of. Those are the Internet portals through which people go to gather information, entertain themselves, and handle their business.
With these new IPOs still bouncing around like mad, you'll want to keep an eye on any new developments. Add any of these companies to My Watchlist to easily track any updates on their performance and prospects.