$10 Billion Zynga Valuation Means We're In a Bubble, Boys

[fundayz]

This is no surprise. It happens every time a new thing catches on or shows profitability.

 

[JDKJ]

I really don't get much of this bubble business, can someone explain?

In very basic terms, it implies that companies are being valued by investors at a much higher value than they're actually worth. They see how much they've grown in value and invest in them, hoping to gain in the same way. It's called a bubble because it's built on confidence, not assets. Zygna doesn't own $10b in assets, it's just how much the market feels it is worth.

Eventually that confidence will collapse as investors see smaller and smaller returns on their investments - a company cannot reasonably expand at this rate forever. At which point they'll sell their stock, get their money out and move on. Because they've sold their stock, the price will start to go down and other investors will also pull out, making the decline gain speed. Other investors in other social gaming companies will see this and pull out also before the same thing happens to them. The whole thing comes crashing down - the "bubble" of confidence "pops". This causes trouble because they were never "really" worth that much money in the first place, and companies collapse under the weight of the obligations they've picked up during the good times.

That's a very basic explanation from a non-economist, but I hope it helps.

Edit: Dammit, ninja'd!

Zynga's valuation is based on its 275 million active monthly users across all its titles. That's the "asset" that's being valued. That user base allows them to (a) sell those users stupid shit that they don't need and (b) sell other advertisers access to all those users who are willing to buy stupid shit that they don't need. Potentially, there's a lot of money to be made in doing (a) and (b).

 

[The_root_of_all_evil]

One word. Myspace.

Cya.

 

[Your Fearless Captain]

I hope nobody tells PopCap!

That one stings.

Also, I knew this was going to bubble.

 

[Metal Brother]

"The chief financial officer of French studio Gameloft says the $10 billion valuation of Zynga is proof that the social and mobile gaming business is riding a stock market bubble."

In related news, scientists report that the sky is blue, and that water is wet!