Mr. Market finally invited Zynga
Shares of the social gaming giant moved 5% higher on Friday -- and continue to ascend today -- after the latest round of gaming data showed a cruel December for traditional video game companies.
Media tracker NPD Group's data for last month is brutal. Industry sales fell 21%, fueled largely by a 28% plunge in hardware sales at the retail level, but also stung by a 14% slide in software.
Shares of Activision Blizzard
Critics will argue that NPD's data is incomplete since it focuses primarily on new sales at the bricks-and-mortar level. Ignoring the sale of used games isn't going to matter to Activision Blizzard and EA. They don't see a dime of the resale money. However, this clearly is a big part of GameStop's business. The small-box retailer makes its juiciest margins by reselling trade-ins.
NPD's numbers also don't cover digital sales, an area where EA and Activision Blizzard are thriving.
However, the market's assumption that what's bad for GameStop is good for Zynga doesn't make sense.
Zynga went public last month at $10 a share, but it has closed in the single digits every single day. It certainly didn't help that analysts pegged the stock's fair value as low as $6 before the IPO even hit the market.
Zynga is profitable -- unlike many of the other busted IPOs that went public in 2011 -- but this doesn't mean that the social gaming speedster is worth its current $6 billion market cap.
The same level playing field that helped grow Zynga into a sensation with FarmVille is also open to developers big and small. We really don't know if Zynga will be able to keep its popularity growing, as proven by the failure of Mafia Wars 2 to gain traction after the original Mafia Wars was a hit.
The NPD data doesn't tell us anything that we didn't already know. Folks aren't buying new games the way they used to. The real story is how we're engaging with older games through multiplayer online game play and how the smartphone, tablet, and Facebook revolutions have opened the playing field to a large number of companies reaching out to a very fickle gaming audience.
Sure, send the gaming stocks lower -- but don't give Zynga a free pass here. It will have to earn it, and so far it hasn't.