The fortunes of Facebook and Zynga are entangled together. Facebook Inc (NASDAQ:FB) provides over 90 percent of Zynga’s revenues while Zynga accounts for 15 percent of Facebook’s.
Zynga Inc (NASDAQ:ZNGA) reported a disastrous quarter in which revenues at $332 million belied expectations of $343 million. Earnings, excluding items were 1 cent a share compared to expectations of 6 cents a share. As if this was not enough Zynga went ahead and cut its estimate of bookings, or sales of virtual goods, from the range of $1.43 billion – $1.5 billion to a much lower $1.15 billion – $1.23 billion value.
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The impact on the company’s shares was rough – in premarket trading they lost almost 40 percent. Many analysts and brokerages cut their price outlook for the company.
Zynga blamed the performance in part on Facebook’s recent changes to “some of the algorithms for surfacing, which affected player engagement.” These changes made it easier for users to locate newer games rather than older ones.
In reflected glory, Facebook Inc (NASDAQ:FB) fell almost seven percent as investor’s reacted to Zynga’s 40 percent fall before the bell.
So did Facebook’s little algorithm change cost it dear? The internecine nature of the social networking companies’ business meant that the change adversely affected Zynga and in the circular scheme of things, this in turn rebounded on Facebook. Someone in Facebook should do a cost-benefit analysis here. Of course, there are other factors that could have affected Zynga’s performance such as user fatigue, expensive acquisitions and delayed game introductions. But it’s clear that Facebook is the major factor that affects Zynga’s fortunes.
Worse, could Zynga’s performance be a harbinger of Facebook’s result today? Remember that Zynga is nearly half of its debut price of $9.50, while Facebook has already shaved 10 percent from its $38 debut price. With analysts reported to have put its intrinsic worth at only about $9.72 a share, Facebook could be on the verge of a precipitous drop at the slightest hint of trouble on current earnings or future outlook.
And what would all this portend for the IPO market? “Considering that Zynga was a recent IPO, it’s another black eye for Wall Street. You bring up an IPO and you get burnt again and again,” said Joe Saluzzi, co-founder of Themis Trading LLC in Chatham, New Jersey.
If Facebook does a Zynga today, it would be really bad news for IPOs.