Zynga Delays IPO, But Don't Worry, Bubble 2.0 Is Still On

Includes: GRPN, P, Z, ZNGA
by: Simit Patel

Zynga (ZYNG), the social gaming company that is one of the most profitable companies in the second round of high valuation dot com IPOs [joining Pandora (NYSE:P), Zillow (NASDAQ:Z), Facebook, Twitter, Groupon (NASDAQ:GRPN), and others still in the pipeline], has just announced that it is delaying its IPO due to inclement market conditions.

There is both good and bad news for Zynga shareholders. Let's start with the bad news: the poor market conditions are not going anywhere. Markets will be more volatile so long as monetary policy and outstanding debt levels remain the same, and will favor short-term, speculative traders -- not long-term investors. If Zynga is really so alarmed by this, perhaps they should re-examine whether or not they want to do an IPO at all. Of course, part of the problem is that the company has raised over $1 billion from private investors, and these folks need a way to cash out. Zynga is profitable and could in theory issue dividends, though $1 billion in dividends is quite a bit to ask for from a company of Zynga's position in the marketplace. Nonetheless, I do believe dividends and securitization of revenue streams will be an increasingly important part of the funding and investment process as stock market volatility makes public equities increasingly unappealing.

Now for the good news: QE3 remains extremely likely, which will have the effect of increasing the money supply and increasing asset prices, as it did with QE2 which Bernanke has acknowledged. At this point, with so much debt being piled on to the U.S. dollar economy, failure to follow through with QE3 will result in a deflationary spiral much worse than the Great Depression, in my opinion -- and thus Bernanke has little choice, and politicians lack the will to cut spending in any significant form. The Fed has a special two-day meeting set to commence on September 21, an event sure to be of paramount importance to those deeply invested in Zynga.

Of course this "good news" is such only for Zynga shareholders, as QE3 will fuel a rise in asset prices but at the expense of the U.S. dollar's purchasing power. So yes, I do consider it a probable event that Bubble 2.0 will continue, and Zynga will get its IPO, as a result of QE3 -- but that the price of this will be higher food and energy costs. High food and energy costs, coupled with widespread unemployment and weak job market for those just entering the work force, have contributed to riots in the Middle East and now Britain. Continuation of existing policies increase the likelihood of such events coming to the United States, and can be viewed as the price of fueling Bubble 2.0 and rising U.S. equity prices in general.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.