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Stock Strategist

Zynga's IPOVille Is Not Child's Play

Potential investors in the newly public social game maker should consider four critical challenges before playing with the stock.

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Zynga (ZNGA) is a leader in the burgeoning market for "free to play" social games. Facebook is a key partner, as more than 90% of revenues and bookings result from users playing games within the Facebook environment. A small number of players generate the bulk of revenues--we estimate that less than 2% of Zynga users spend money on virtual goods. Based on this small paying user base, as well as short average playing periods for these users, we don't award Zynga an economic moat, although we believe the company may be able to develop some level of defensibility over the near term.

Below we outline why we believe the market may be overstating the potential market size for Zynga as a social game developer.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.