Are we entering in a second Internet stock market bubble?

Everybody knows the Internet bubble of 1998-2000.  Valuations of most firms with a link with Internet got very high valuations and after lost a lot of value in 2000-2002.  At that time a firm with the name .com was found sexy by acquirers and represented a great potential takeover target with the exchange of shares (which were only going up) instead  of cash.  After the crash, firms surrounding the Internet, which had a poor business model, lost most of the time 90-95% of their values, or went bankrupt.  E-commerce mutual funds which had 200% return in one year and a half, like Altamira E-commerce fund lost 90% of their value in 2001-2002.


Time has changed and the web 2.0 has seen the emergence of new sexy players such as Youtube, sold to Google and Facebook, just to name a few. I just read that Facebook's value has triple in 2010 only.  Social networks is the new sexy sector and now you can find a 4 years old firm like Zynga, which is a social video game firm, with a value higher than Electronic Arts, which is 28 years old firm in video game.  Zynga is now valued on the secondary market at $5.27 billion on SharesPost, where Zynga employees can sell shares that they own in the private company. EA is worth $5.24 billion in public trading on the Nasdaq stock market. The SharesPost listings are thinly traded compared to EA’s stock, but it is perhaps the only real measure of the value of Zynga’s stock at any given moment. Several hope that Zynga will go public, but it hasn’t any plan yet. 


I simply don't understand why people will pay real dollars to use virtual currency in virtual games. Zynga is expected to grab roughly a third of the $1.6 billion market for virtual goods in the U.S. in 2010,  thanks to virtual goods sales.  Zynga got the momentum when in the middle of 2009 they launched FarmVille, which is still the No. 1 game on Facebook with 57.4 million monthly active users. With such popular games, Zynga can cross-promote its titles and advertise them as well, allowing it to turn lots of its games into huge hits. In addition to FarmVille and Texas Hold Em Poker, FrontierVille, Mafia Wars, Cafe World, Treasure Isle and PetVille all have more than 10 million users. Overall, Zynga has 214.5 million users. CrowdStar has 54.2 million monthly active users, and EA is No. 3 at 44.7 million users. EA bought Playfish for $400 million in the fall of 2009, but is still behind Zynga in that area.  However, EA’s online game revenue is at $750 million in the current fiscal year, or around 20 percent of overall revenue, is significantly bigger than Zynga’s online game revenue, which the only source of revenu of Zynga.  The largest independent maker of video games is Activision Blizzard, which has titles such as World of Warcraft. 


It appears that the market values Zynga as equal to EA in market share, so it is deeply discounting the rest of EA’s nearly $3 billion or so in traditional video game console and PC game revenues. It seems that Zynga is truly overvalued and in some sectors of the Internet, like the Web 2.0 we are in the presence of a second Internet bubble.


Another example of this is Apple, which has 83% of the market capitalization of Exxon Mobil.  Apple has a P/E ratio of 20.8 and Exxon a low 12.8.  It is true that Apple is one of the best innovator in the world and has created a dependency for its customers toward its proprietary platforms, such as iTunes and Apple Apps store.  Apple is more a telecom firms and a content firms than it was before, as an hadware firm.  The potential of its mobile advertising network is huge.  The question is can Apple create on the long term 83% of the profits of a firm, such as Exxon Mobil?  I explained in previous comments that the dependency of Internet mobile can create huge values.  However, I have a certain doubt that it would represent a long-term oligopoly, such as gas with Exxon Mobil.  We are much more dependent right now (and in the medium term) toward gas than toward Internet Mobile access and its ecosystem (apps, music, etc.). In a bubble it won't mean that P/E ratios will diminish in the short term, but in the medium and long term, there will be important depreciation of overvalued Internet stocks.


Louis Rhéaume
Infocom Intelligence
louis@infocomintelligence.com