Can the Zynga Ship Be Sinking Already?

That didn't take long.

Only a week after Zynga (NAS: ZNGA) filed for a secondary offering to enrich its early shareholders, the company filed an amendment that adds one very high-profile shareholder to the sell side. CEO Mark Pincus will be selling the single-largest amount of shares in the secondary offering, far more than any other named shareholder and approximately 15% of his total stake in the company. Because Pincus is selling only Class B shares and retains hold of his exclusive 70-vote Class C shares, the sale barely dents his voting power. But such a large divestiture at so early a stage in the company's life sends a terrible message to those who might want to pick up his scraps.

Watch your back
Zynga's been a public company for all of three months and has been a company for just under five years. Its available information shows a company growing rapidly, but also one whose growth is now slowing rapidly. Zynga's business model offers relatively minimal moats, a quality driven home by its recent buyout of out-of-nowhere competitor OMGPOP. To drive home just how fast a hot property can be surpassed, the latest Angry Birds iteration flew (angrily, of course) over OMGPOP's top-selling game the day after the acquisition.

So what kind of message is Pincus sending? Steve Jobs sold his early shares when ousted from Apple (NAS: AAPL) in the '80s, but he held every share the company granted him after returning until the day he died. Google's (NAS: GOOG) founders filed to sell about 17% of their holdings by 2014, but that filing came more than a decade after the company's Stanford genesis. Executives have every right to sell their shares, but a large sale so soon is not a vote of confidence in a company that has no secure path to long-term success in a cutthroat industry with little barrier to entry.

Zynga can't buy out every competitor that crops up. Its business model has been allegedly codified as "copy what [our competitors] do ... until you get their numbers." There's nothing necessarily wrong with lifting the best elements off other games. Activision Blizzard (NAS: ATVI) , for all its success, still relies largely on formulas set down by earlier games -- World of Warcraft lifted liberally from Everquest and other first-generation MMOs, and Call of Duty is, well, a shoot-'em-up game, a format relatively stable since Doom. But there's a difference between improving on standards and simply replicating things as closely as possible.

Pincus isn't a dumb guy. He's built a billion-dollar business in half a decade. But that doesn't mean he sees his company staying dominant, and a big sale so soon after the company's post-IPO run-up sends me the wrong signal. If you're looking for long-term growth, there are better companies -- and better industries -- to invest in.

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At the time thisarticle was published Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter,@TMFBiggles, for more news and insights. The Motley Fool owns shares of Activision Blizzard, Google, and Apple and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Google, Apple, and Activision Blizzard, creating a bull call spread position in Apple, and creating a synthetic long position in Activision Blizzard. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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