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Mark Pincus, Zynga Inc. CEO, on Oct. 11, 2011. Year invested in Facebook: 2004 Number of shares being offered: 1 million Value at $35 per share: $35-million (Stephen Lam / Reuters/REUTERS/Stephen Lam)
Mark Pincus, Zynga Inc. CEO, on Oct. 11, 2011. Year invested in Facebook: 2004 Number of shares being offered: 1 million Value at $35 per share: $35-million (Stephen Lam / Reuters/REUTERS/Stephen Lam)

No fun and games these days for Zynga Add to ...

Facebook Inc.’s falling share price is creating collateral damage at Zynga Inc. , the company that makes the games that make Facebook fun for so many — and generates tons of cash doing so.

Zynga, which went public last December at $10 (U.S.) and traded as high as $15.91, dipped below $6 Tuesday, setting a new low. It closed at $6.09. Volume of more than 48 million shares was nearly three times the 16 million average.

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The company, which makes FarmVille, Mafia Wars, and other social-media games, gets more than 90 per cent of its revenue ($321-million in the March quarter) from the Facebook platform.

Zynga has been dinged by the investor pessimism at Facebook, which priced its IPO at $38 on May 17 and, since its first trading day, has fallen. Zynga closed at $8.27 on May 17 and is down roughly 25 per cent in the last seven trading days.

As it happens, Zynga is the victim of bad timing in another way: Tuesday was the expiration of the “lock-up” period in which many pre-IPO investors were prevented from selling shares on the open market. The lock-up expiration is often a bad time for recently-IPO’d companies, as it creates a wave of selling that can push down the share price.

Volume data suggests the expiration played a role in Tuesday’s Zynga performance, with more than 38 million shares already traded with an hour left to go in the session. That’s more than twice the recent average volume of 16 million shares.

Zynga had been concerned enough about the lock-up expiration that it facilitated the sale of 43 million shares, from some but not all insiders, at $12 in a secondary offering in late March. The company said at the time “the principal purposes of the offering are to facilitate an orderly distribution of shares and to increase the company's public float.”

In exchange for the privilege — in retrospect, a valuable one — the insider sellers agreed to extend the lock-up on their remaining shares until early July.

The decline in Zynga’s price now makes it one of the cheapest social-media stocks. Its forward price-to-earnings ratio dipped below 20 Tuesday, per Standard & Poor’s CapitalIQ. Facebook’s forward P/E remains above 50, while LinkedIn Corp. and Groupon Inc. are above 100. Pandora Media Inc. and Yelp Inc. aren’t expected to be profitable in the next year, so they have no forward P/E.

In the last 12 months, Zynga generated $364-million in operating cash flow on slightly more than $1.2-billion in revenue. It now has more than $1-billion in cash and no debt. With about 730 million shares outstanding, Zynga has a tangible book value of just under $2 per share.

That may be a sign that social-media selling is overdone: When price-to-book ratio comes into play.

 
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