You guys know that I’m not a fan of Goldman Sachs and JP Morgan and how they are the underwriters on many of these tech companies going public. They set the initial IPO too high. They hype the IPO too much. And they should go to jail for using their stock analysts to rate the stock a buy based on flimsy bogus logic, and non-existent numbers.
Former New York Attorney General Eliot Spitzer fought to fix the situation by forcing companies like Goldman Sachs and JP Morgan to only compensate their stock analysts from non-IPO funds. Of course the big power financial firms didn’t like Spitzer and ultimately they helped take him down by using Fox News and a prostitute scandal. With Spitzer gone, powerful firms like Goldman Sachs and JP Morgan went back to publishing bogus analyst reports on companies they took public.
Goldman Sachs and Morgan Stanley are two companies that took Zynga public, being paid some $33 million dollars for their efforts. Mutual Funds managed by Morgan Stanley, then invested in Zynga at $14 per share. In other words, if you hire Morgan Stanley to take your company public, they won’t just hype the stock. They won’t just produce bogus analyst ratings reports trying to suck in amateur traders like you and I. No, they’ll even direct client funds in their managed Mutual Funds division to actually buy the stock and pump up the price.
Last week, the Macquarie Group and analyst Ben Schachter stepped in with some truth. The Macquarie Group was not an original underwriter of the Zynga IPO. The Macquarie Group had the guts to come out and publish what many of us have already known, Zynga relies on too small a number of customers for the majority of its revenue therefore it’s a very risky speculative stock.
But the Macquarie Group didn’t just stop there. They conducted their own independent research, that is independent of the underwriters of the Zynga IPO, and it turns out only 2% of Zynga’s 150 million users pay to play its games! That’s right. Goldman Sachs, JP Morgan, Morgan Stanley, Barclay’s and Bank of America all were paid to take the company public, and all pumped the stock in bogus analyst reports that made up huge forecasted revenue numbers based on Zynga’s current 150 million users customer base but in reality, 98% of those 150 million users are not really customers at all but just people taking advantage of a free game. If someone is not paying you, can you really classify them as a customer? No. Their a prospect until they actually become a customer. The only customers Zynga actually has are a mere 2% of 150 million users or just 3 million paying customers. But it get’s even worse folks. Of those 3 million actual customers of Zynga, just 680,000 account for over 70% of Zynga’s $800 million annual revenue.
Now Morgan Stanley had it’s mutual funds buy Zynga, a company it was paid to take public, at $14 per share. Today the stock trades at about $9 per share, down a whopping 35% for those poor folks that hold Morgan Stanley mutual funds in their 401Ks and retirement programs.