Most tech companies go public so their early investors and management can cash-out. But some have other things in mind, and Zynga (ZNGA) appears to be one of those. Zynga's IPO gives it currency with which to make acquisitions, and offers a way to tap more capital as it seeks to transform itself.
Zynga's plan (and it has been transparent on this for months) is to make itself independent of Facebook by creating its own Z-Cloud and making Zynga.com a destination site for games. Rather than just being a games company, in other words, Zynga plans to be a game cloud, selling cloud services as well as games.
The Z-Cloud, in turn, may be the biggest win for Citrix (CTXS) in quite some time, and by consequence a big loss for Amazon.Com (AMZN). Zynga has been Amazon's largest customer, bringing in a reported $100 million/year.
Citrix produces the Xen Hypervisor and a cloud system called Cloudstack. It has been touring Zynga as a reference customer for months, and the recent announcement lets it talk about the relationship in detail. This could bring it more customers who have feared that Xen was being overtaken by KVM or that Cloudstack might be losing out to stacks from VMWare (VMW), Red Hat (RHT) and the open source Open Stack, originally sponsored by Rackspace (RAX).
The Zynga relationship is strong enough; Citrix was able to raise its guidance in January. If earnings meet that guidance of $2.50/share for fiscal 2012, it would yield a P/E of about 30, much lower than its cloud rivals, and a platform on which to build share gains.
As for Zynga, the new platform makes the stock much riskier than before, but also holds out the promise of greater reward. A hiccup in its Z-cloud would be a lot more serious than Microsoft's (MSFT) February 29 problem with Azure, given its strategic importance. But should the Z-cloud succeed, the company would have lower expenses, fatter margins, and the ability to compete with other public clouds, giving it enormous growth potential.
For Amazon, the news is bearish. Zynga is a customer that will be hard to replace. On the other hand, the growing competition among public clouds will in time put a premium on lower-cost infrastructure, and since Amazon has been in this business a long time, it could perform well on that basis.
The loss of Zynga's lead game designer and general market conditions should put some short-term downward pressure on the stock, but these moves are strategic. If you believe in them, the move down is a buying opportunity.