I must have deleted 50 invitations from my Facebook (NYSE: FB) “friends” to play the online game Candy Crush. But not everyone finds them annoying. In fact, 93 million people actively play Candy Crush.
With a gaming platform on Facebook and an app for both Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) Android devices, Candy Crush is one of the most popular games.
King Digital Entertainment is the company behind Candy Crush. And it just announced plans to raise $500 million in an IPO. The deal could value the business at $5.5 billion. That’s incredible when you consider that the company has raised a total of just $9 million since it’s founding in 2002.
King Digital Entertainment bears a lot of similarities to Zynga (NASDAQ: ZNGA). For investors considering this red-hot IPO, that isn’t a good thing.
Just take a look at Zynga’s performance since its December 2011 IPO.
78% of King Digital Entertainment’s revenue comes from Candy Crush. This incredible dependence on a single game makes the company extremely risky for investors.
That’s because online games are like fads. A select few mobile games become “hits.” But the top games don’t remain on top for long, and they’re soon replaced by new alternatives. The fact is, users get bored and gaming companies fail if they are too dependent on individual games.
It is an unsustainable business model, especially in the case of King Digital Entertainment, which is totally dependent on its Candy Crush and Pet Rescue Saga games.
Some growth investors will be attracted to the company’s rapid growth. King Digital grew its profits an impressive 7,000% last year thanks to Candy Crush. Total revenues for the year were $1.88 billion.
However cracks are already beginning to emerge.
The company reported a sequential decline in quarterly revenue in the last quarter. The CEO explained this was a result of “the seasoning of our older games in certain markets among our more occasional customers.”
That is simply a complicated way of saying of “people got bored” that I have ever read. Users are already losing interest, and that’s very bad news for King Digital Entertainment.
The fact is, King Digital Entertainment is built on quickly moving mobile fads and their business model is designed to make the most of a game’s short lifespan. But with 78% of revenue coming from one game, what happens when users get bored and don’t move on to another game from the same company?
Not only does the end seem near, it seems that company executives know it. Since October, the company has paid out $504 million in dividends to its shareholders. That’s about the same amount that King Digital Entertainment now hopes to raise in the Candy Crush IPO.
With the founders and existing investors cashing out, it’s a good sign that this deal will be a flop. King Digital Entertainment is Zynga 2.0, and even growth investors should steer clear of the Candy Crush IPO.
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