Zynga Is A Positive For The Market

As of this writing Zynga is down over 10% from where they priced their IPO. I view the decline in Zynga as a positive for the market for numerous reasons. This will lead to less supply in terms of IPOs and secondaries. Additionally, bubble like valuations are not long term positives for the market.

I view IPO's and secondaries as supply into the market. Last week we saw about $4 billion in IPOs and secondaries. $4 billion that could have gone into other stocks was needed to absorb this supply. In the future it will now be much more difficult for bankers to price their junkier supply. This should lead to less supply.

For every Amazon during the internet boom in the nineties there were 10 Webvans, Globe.com, etc.. During the internet boom everybody was being priced like a winner, even though the vast majority of the stocks went to zero or thereabouts. We are seeing a similar dynamic in social media. There will be winners but right now everybody is being priced like a big winner. Zynga is a video game maker that happens to make video games for social media. These video games are far less sophisticated than what companies like Electronic Arts make yet the valuations are not even in the same stratosphere. There are no barriers to entry and these games are relatively simple to make.

In the long run the only people who benefit from unsustainable bubble valuations are those selling and the bankers getting a commission. Investors that get burned no longer want to invest, whether they get burned directly or through a mutual fund. Hopefully, the fall in Zynga will lead to less junk supply from bankers and more rational valuations.

4 comments:

Monday links: a zero-bound policy | Abnormal Returns said...

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Monday links: a zero-bound policy | My Blog said...

[...] a dump in Zynga ($ZNGA) is a good pointer for a market.  (Capital Observer also [...]

Monday links: a zero-bound policy said...

[...] the drop in Zynga ($ ZNGA) is a good sign for the market.  (Capital Observer also [...]

Mutual Funds | Mutual Fund Observer | | Top Online ResourcesTop Online Resources said...

[...] Zynga Is A Positive For The Market Page Description: Capital Observer – A real time diary of the thought process that goes into making my investment decisions. Keywords: [...]