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Thursday, 15 December 2011

Zynga and Jive IPO

GBoth Jive software and Zynga is set to go live this week, with Jive being on the stock market just recently and Zynga to be listed on Friday.

Jive Software Inc. (NASDAQ:JIVE) raised $161.3 million in its initial public offering, 38 percent more than first sought after pricing the shares above the marketed range.

The company, which makes social-networking software for businesses, sold 13.4 million shares at $12 apiece yesterday. It had planned to offer 11.7 million for $8 to $10 each, according to regulatory filings. The stock started trading 2 days ago on the Nasdaq under the symbol JIVE.

Its software allows employees to collaborate on projects and communicate with customers. Revenue at the company, which counts NetApp Inc. (NASDAQ:NTAP), Nike (NYSE:NKE), and Hewlett-Packard (NYSE:HPQ) among its clients, has surged in the past three years.

Jive’s net losses widened to $38.1 million in the first nine months of 2011, from $20.9 million a year earlier, while sales climbed 73 percent to $54.8 million. The top end of the originally proposed IPO range valued Jive at $573 million, or 8.3 times sales in the year through September 30. Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM), both named as competitors in Jive’s IPO filing, had a ratio of 3 and 2.1 for the year through September, respectively.

Zynga's sales more than doubled through September, to $829 million, and it has earned $121 million since the start of 2010, according to its SEC filing. What is more, the top five games on Facebook are Zynga titles: CityVille, CastleVille, FarmVille, Zynga Poker and Words With Friends.

For investors, this is a warning not to participate in this company. Other competitors like Microsoft is set to enter the market and strangle it to death. In addition, it's track record is worse than Zynga which has doubled sales through September, to $829 million, and it has earned $121 million since the start of 2010, according to its SEC filing. Despite the initial pop that Jive have and is now trading at $15, $3 more than it's IPO price of $12. Given the current market situation, it is set to fall below it's IPO price soon. 

Either is Zynga a good stock to hold in the future. It's overreliance on Facebook as it's main revenue stream is far too risky. In addition, user activity has fallen for some of the games that they have said to be the top 5 games on Facebook. 

Zynga's business model may do good in an recession as it allows users to pay small amount of money to feel good. However, given that the traffic growth for their games would slow over time and that current paying users would get bored after a while, it is difficult to keep coming out with new items and themes to attract users to part with their money without making the games being too bloated. The revenue from advertising is way too little to replace the revenue from the sale of it's products. In addition, advertising revenue is fluctuates quickly with the economic cycles and is typically the department to be cut. 

Given the strong hype over the two IPO, one may try to profit from the initial spike in share price. However for the long run, I would not put this two shares in my portfolio. 

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