Facebook shares collapse after gaming company Zynga announces a decreased number of paying customers
Facebook has been dealt another blow after Zynga, the gaming company responsible for much of its revenue, announced that it was slashing its outlook for the year.
Facebook shares had slipped by 2.5% to $21.41 by Friday afternoon after Zynga announced that its number of paying customers had fallen.
Analysts have once again reduced their expectations for Facebook over fears that the company is overly dependent on the struggling maker of FarmVille and Mafia Wars.
At one point Zynga’s shares fell by 20% to just $2.21 – a fraction of the $15-plus they were worth in March.
Facebook is strongly exposed to any deterioration in Zynga’s performance, as it derives around one seventh of its revenue from the company’s games.
In turn, Zynga is heavily dependent on Facebook – it gets most of its revenue from titles that are played on PCs using the site’s social gaming platform.
Its games FarmVille, FrontierVille, Zynga Poker, Mafia Wars and CityVille accounted for 83% of the total revenue last year.
In July, it reported a sharp fall in second-quarter revenue as it struggled to retain users on Facebook.
The percentage of paying users continues to decline as a greater variety of games becomes available for free on Facebook, Macquarie Equities Research analyst Michael Pachter said.
The company has also been hit by delays in its game pipeline as older titles fade and it has struggled to come up with new hits for mobile devices.
Zynga said on Thursday it was still struggling to stem user flight from Facebook games like CityVille and FarmVille.
“Modest user churn and engagement erosion likely accelerated during the spring and has continued to date,” Piper Jaffray & Co analyst Michael Olson said.
The company will continue to struggle because of newer titles overtaking older and more successful games and lower revenue generation rates for its mobile games, according to another analyst.
The company’s more recent hit games such as Words With Friends and Draw Something were developed by independent firms which were then purchased at huge cost, not created in-house.
As these games are mostly played on mobile devices, they generate less revenue for Zynga.
During the third quarter, Zynga was hit by a charge of up to $95 million related to its $182 million acquisition of OMGPOP, the creator of Draw Something.
Macquarie Equities Research cut its price target on Zynga stock to $2.50 from $3.50. Wedbush Securities slashed its price target to $4.00 from $7.00 and Evercore Partners cut its target to $1.70 from $2.00.
The San Francisco-based company, which went public with much fanfare in December, has since lost three quarters of its market value.
Though the company’s new web-based games began well, growth tailed off after hitting about 7 million daily active users.
Several of its top executives including Chief Operating Officer John Schappert and Chief Creative Officer Mike Verdu have quit the company since August.