I normally do not write about consumer Internet stocks, but the recent news that Alibaba invested in Kabam ( a game-maker) at a valuation of $1 billion and that Machine Zone (a top-grossing game on the Apple App store) is apparently raising money at a rumored $3 Billion valuation got me excited.

Why?  Because eventually these companies may go public and if they do, despite everything investors have learned about these game stocks, they will still likely be overvalued.  This will create a nice opportunity for the skeptics among us.

I’m not a gamer, never have been.  Not Nintendo, Xbox, PS 4, even apps.  (Maybe a little Fruit Ninja on the iPad when the kids were younger.)  I know very little about this massive industry and really have very little right to comment.  I hear the new games are multi-player, have new freemium strategies and they offer opportunities to buy in-game items, blah, blah, blah.    In other words, the proponents say, “these companies are different.”

But what everyone that has ever played any kind of game knows is:

  • very few of these games create massive franchises and become more than a passing fad.
  • competition in this industry is fierce
  • people only access a total of about 20 apps at any given time (Meaning shelf space is tight and yet supply is seemingly endless.)

Nonetheless, when the latest gaming fad hits the stock market, the public will likely throw caution to the wind and convince themselves that these companies will not be “one-hit” wonders.  In scientific terms, I suppose this is dubbed the “recency effect” by behavioral economists!

The pattern on the last two gaming IPOs, Zynga and King Digital, could not be more clear. Even though Zynga sank its first day on the market, and King Digital was much more reasonably valued, they have both been good shorts.



Slide3Rovio (remember Angry Birds?) did not go public but still reported in April (presumably as a public service) that its 2013 profit fell 50%.

So here’s to Kabam and Machine Zone, we are waiting for you!

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