Another day, another crazy internet IPO.
Following Facebook and Twitter’s successful floats, King Digital Entertainment has also joined the IPO party. It’s the maker of Candy Crush Saga, and it’s expected to be valued at $US7.6 billion when it goes public this month.
For the uninitiated, Candy Crush Saga is a free mobile app that requires the player to push together matching coloured candy into lines of three.
Apparently it’s addictive, and has some impressive numbers behind it.
Since launching in April 2012 it’s been downloaded over 500 million times. And it has generated revenue of US$602 million in the fourth quarter of 2013 for King. That’s up from US$22 million in the first quarter of 2012.
That’s big revenue growth, sure, but it’s mostly due to Candy Crush downloads. King makes around 180 other games which don’t even come close to the popularity of Candy Crush.
Can Candy Crush sustain it’s growth?
The mobile game app is a big market — estimated at US$17 Billion.
But it’s unlikely Candy Crush will be able to sustain its growth.
Games are essentially a single-use products. While other tech companies can expand their platforms — think of the new features Facebook constantly adds — games remain mostly the same.
That’s fine if the product in question is one you need, or one it does a better job than your competitors.
But there are literally hundreds of millions of digital games on the market, each there to tempt bored commuters or lazy office workers.
And it seems unlikely that Candy Crush will remain the game of choice. In fact, odds are that another fad will sweep the game away.
Fads of the past show Candy Crush IPO is overrated
How can we be so sure?
Well, other popular games have come and gone.
Farmville for example was once the ‘addictive’ game of the moment.
In a similar flurry of insanity the company behind the hit Facebook game was valued at US$7 billion when it started trading on the stock market in 2011. At the time, that was the biggest internet IPO since Google.
But guess what? Farmville’s popularity waned and its stock price has since halved.
You’d think that would cool the excitement surrounding the >Candy Crush IPO.
But no, it hasn’t.
Instead, investors are smacking their lips. Are they crazy? Possibly, but no more crazy than other tech investors of late.
And King has one thing many other tech companies don’t: an ability to turn a profit.
Making a profit before tax of US$714.3 million last year, King stands out among other tech firms that have popular products, but no way of making money.
Still, the company seems massively overvalued considering how fickle our tastes in online gaming are. Maybe Wall Street traders are just looking for an excuse to play Candy Crush in the office?
Contributing Editor, Money Morning