These days, smartphone and tablet users are obsessed with one game above all others –Candy Crush Saga, the popular Bejeweled clone from privately-held King. Last month, Candy Crush became the most popular game on Facebook Inc (NASDAQ:FB), attracting over 15 million daily users. King, which also creates Bubble Witch Saga, Farm Heroes Saga and Papa Pear Saga, has a monthly active user base of 190 million and 70 million daily players. By comparison, Zynga Inc (NASDAQ:ZNGA) has 232 million monthly active users and 60 million daily users, indicating that King has been far more successful at retaining its users.
King’s recent success fueled speculation for a buyout offer or an IPO. A recent report from theWall Street Journal indicates that King is leaning towards the latter option, and has already hired JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) to take steps towards a public offering. This was expected, since CEO Riccardo Zacconi has told the media on multiple occasions that his company was preparing for a possible IPO in 2013. Zacconi states that King has been profitable since 2005, although no exact numbers are known regarding its top and bottom line growth.
After witnessing Zynga Inc (NASDAQ:ZNGA)’s 70% post-IPO plunge over the past 18 months, it doesn’t seem likely that investors will be eager to pounce on another social gaming company, even one as popular as King. I believe that if King indeed goes public, investors should stay far away, for the following reasons.
The lessons of the past
It’s impossible to talk about King without comparing it to Zynga. In its most recent quarter, Zynga reported an 18% year-on-year decline in revenue as its bottom line plunged 119% plunge into unprofitability. Monthly active users fell 13% to 253 million as daily active users dropped 20% to 52 million. Although Zynga Inc (NASDAQ:ZNGA) blamed the technological shift from desktop social platforms to mobile apps for its losses, the company has been constantly criticized for slavishly imitating more successful franchises, a practice which the company’s VP Dan Porter openly admitted. Forbes even ran an article last year revealing all the games that Zynga has cloned.
Zynga has also been desperate to buy original popular titles, as seen with its abrupt $200 million acquisition of Draw Something creator OMGPOP last year. That turned out to be a wasteful purchase, since Zynga eventually shut down the studio as part of a company-wide cost reduction and restructuring effort.
Lack of originality
King will face the same challenges as Zynga Inc (NASDAQ:ZNGA) if it goes public. Underneath its cute and polished graphics, Candy Crush is really just PopCap Games’ Bejeweled with some added features.Bubble Witch Saga is simply Puzzle Bobble with more bells and whistles. Yo-Yo Jackpot is a clone of Zuma, also from PopCap. It would be foolish for anyone to treat these games as new intellectual property. In addition, PopCap Games is now a subsidiary of gaming giant Electronic Arts Inc. (NASDAQ:EA), which has used its deep pockets to fund an aggressive expansion into mobile gaming.
If King goes public, it will face extremely unfavorable comparisons to Zynga, as well as questions regarding its ability to remain competitive against EA. Although King is basking in its 15 minutes of fame with Candy Crush, the game’s popularity will inevitably wane over time. Investors should remember how once-popular Facebook titles such as EA’s Restaurant City and The Sims Social slowly faded away until they were discontinued. Both games hit the top of the charts for a few months but were quickly abandoned after gamers moved on to other games.
However, this lack of originality isn’t unique to Zynga Inc (NASDAQ:ZNGA) or King. Finnish company Supercell made a name for itself with two formulaic games, the medieval strategy game Clash of Clans and a farming game, Hay Day. Supercell claims that these two games are generating $500,000 in daily revenue and that the company is currently profitable. Meanwhile, Rovio Entertainment has milked its flagship Angry Birds franchise for as long as possible, generating over half of its $200 million in revenue last year from sales and licensing of its associated merchandise.
Lack of a defensive moat
The problem with game makers like King and Zynga is the complete lack of a defensive moat against larger competitors. Electronic Arts was able to shift very quickly from social to mobile gaming, by shutting down four of its core Facebook titles to divert funds towards releasing 15 new mobile titles for fiscal 2014. Electronics Arts’ upcoming mobile games, which will includePlants vs Zombies 2, a Bejeweled sequel, and various EA sports titles, stand to make titles from King and Zynga look bland and outdated.
Electronic Arts also has a huge stable of mainstream video game properties to make mobile versions of, such as Mass Effect, Star Wars, Dragon Age and Battlefield, which could boost its presence in mobile gaming substantially. “Second screen technology” from Microsoft Corporation (NASDAQ:MSFT)’s XBox One and Sony Corporation (ADR) (NYSE:SNE)’s Playstation 4 could also alter the way gamers interact with mobile games. Many of these console based games, which are the territory of triple A publishers EA, Activision Blizzard, Inc. (NASDAQ:ATVI) and Ubisoft Entertainment SA (EPA:UBI), have mobile components, which could be played as standalone social games themselves to enhance the console experience.
The Foolish Bottom Line
I hate to be such a pessimist regarding King, given the public’s cute obsession with Candy Crush, but I believe that investors should avoid this company’s IPO. King faces the exact same problem as Zynga Inc (NASDAQ:ZNGA): fickle gamers with short attention spans.
Although a short-term solution is to churn out familiar games cloned from timeless formulas, King will have to continually pump out hits to keep generating revenue. However, that constant pressure to create new games to retain gamers’ interest will be a tough one that could easily lead to lower-quality, rushed titles.
In conclusion, there’s no real good investment out there in the world of social gaming. Even though Supercell currently enjoys such great success with only two titles, what happens when just one of those titles experiences a decline in active users? Rovio might have built up a strong brand presence with its omnipresent Angry Birds and Bad Piggies merchandise, but does this mean that the company can keep growing into the next decade?
Therefore, if a Candy Crush IPO comes your way, take your dentist’s advice. Avoid sugary stocks like this and your portfolio might be spared from some nasty cavities.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Will Candy Crush Cause Cavities in Your Portfolio? originally appeared on Fool.com.
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