When looking at all the 2011 IPOs that were likely to hit this year the one that jumped out to me with the most potential was Zynga (ZNGA). Here was a fast growing company in an area I expected to continue to grow at a fast pace. Revenues were climbing and they were actually earning money. That was roughly nine months ago so let’s zip ahead to present day and the S1 filing from the other day.
First of all let’s look at who is really making out in this IPO by looking at the shares that will be outstanding after the IPO. Besides the almost 600M shares go look at the excluded shares from the S1 filing that will most certainly be issued. The number of shares of Class A common stock, Class B common stock and Class C common stock to be outstanding after this offering is based on no shares of our Class A common stock, 564,931,115 shares of our Class B common stock (including preferred stock on an as-converted basis) and 20,517,472 shares of our Class C common stock outstanding as of September 30, 2011, and excludes:
- 109,157,667 shares of Class B common stock issuable upon the exercise of stock options outstanding as of September 30, 2011 under our 2007 Equity Incentive Plan at a weighted-average exercise price of $0.93 per share;
- 99,994,695 shares of Class B common stock issuable upon the vesting of restricted stock units, or ZSUs, outstanding as of September 30, 2011 under our 2007 Equity Incentive Plan;
- 18,854,848 shares of Class B common stock issuable upon the exercise of warrants outstanding as of September 30, 2011 at a weighted-average exercise price of $0.0246 per share, which warrants are expected to remain outstanding after this offering;
- 4,632,918 shares of Class B common stock reserved for future issuance under our 2007 Equity Incentive Plan as of September 30, 2011; provided, however, that immediately upon the signing of the underwriting agreement for this offering, our 2007 Equity Incentive Plan will terminate so that no further awards may be granted under our 2007 Equity Incentive Plan;
- 42,500,000 shares of Class A common stock reserved for future issuance under our 2011 Equity Incentive Plan, which we plan to adopt in connection with this offering; and
- 8,500,000 shares of Class A common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which we plan to adopt in connection with this offering.
Besides the billion or so shares that might eventually be outstanding the revenue growth appears to be declining. While revenue for Q3 2011 was up 80% from last year's Q3 2010 and at $306M, they only grew 10% from this year's Q2 2011. In fact Q2 revenue only grew 15% from this year's Q1 revenue. While still good numbers it would seem to indicate a saturating of their core markets.
Another note even with the 80% revenue growth earnings actually dropped to $12.5M in this year's Q3 compares to last year's $27.2M – not a good trend to increase revenues that much and yet earn much less on those revenues.
Recent trends in IPO’s such as Zynga and Groupon (GRPN) seem to indicate companies that are waiting longer to actually IPO are issuing more shares and have already passed their high growth periods. What this means to investors is hard to say but instead of buying into high flying super growth companies it certainly looks like the expectations for these companies had better be much lower. As we all know, expectations on Wall Street are never low and tend to be harsh for companies that do not exceed expectations.
My guess is the Zynga IPO will launch off the pad just like Groupon did the other day. This is based more on hyped up demand and keeping the number of shares available to a minimum. Long term investors may be purchasing shares in a company that already has seen its best growth days behind it where it will need to rely on actually earning money instead of just the mere promise of it. I’m guessing this business model may unfortunately present more virtual results than tangible ones.