Should European games developer King remain private because 78% of its (massive) revenues is derived from a single game, as James Surowiecki opines in The New Yorker?
Probably yes, if you ignore the fact that many 'one-hit wonders' have been wonderful hits on the public markets before.
The maker of popular mobile game Candy Crush Saga, which is oddly referred to as an Irish company in the article because the Swedish-British company recently changed its registered office to one in Dublin for tax reasons, certainly presented some stellar performance facts and figures when it filed for a U.S. IPO with the SEC last month.
Its revenue in 2013 totalled almost $1.9 billion ($2.8 million+ per employee), with net profits of approximately $568 million. More than 93 million people play Candy Crush Saga every day (and multiple times at that), and it has 128 million daily active users across all its games.
But, indeed, only 4% of Candy Crush Saga players pays for extras, and King’s top three games (including Candy Crush Saga) accounted for 95% of the company's total gross bookings in Q4 2013.
There's a genuine risk involved with investing in King because of this. There is a chance that King is a one-hit wonder in a hit-driven industry with increasing competition and churn. There's no denying that.
But calling for the company to shelve its IPO plans seems a bit far-fetched to me, especially for reasons that going public would be a good way for early investors to cash out (I thought that was kinda the point of investing early).
The flip side
Candy Crush Saga was only released for mobile devices back in November 2012. This is a game that's been live for less than a year and a half, and people are already racking up more than 1 billion daily game plays. The tens of millions of people playing (and paying for) the game aren't going to stop and delete the game overnight, even if Candy Crush has an almost inevitable expiration date.
King had cash and equivalents worth $409 million in 2013. It also has zero debt. It has been cash-flow positive since 2005, years before Zynga was founded or Rovio released its hit game Angry Birds. The company also has valuable intellectual property in an increasingly competitive market (more than 180 game IPs and counting), which is often overlooked.
King may have a one-hit wonder on its hands, but I wouldn't call the company a one-hit wonder as a result. King has been around for more than a decade, and it's successfully made the switch from casual Web-based games to mobile games in recent times, which is no mean feat.
If I were an investor, I'd proceed with caution, but I would also take into account that King by now knows mass gaming mechanics inside out. The chances of the company consistently growing the revenue it derives from Candy Crush Saga, while experimenting and learning about the new realities of mobile gaming in order to create new mega-hits down the line, are relatively high.
One thing the IPO will buy is time
King spent roughly $110 million on R&D in 2013, or almost 20% of its net income for the full year. The company is fully aware of the risk of Candy Crush Saga being a fad, and it acknowledged as much in its SEC filing ("we must develop new games and enhance our existing games so that our players will continue to play our games and make purchases of virtual items within our games").
Even if it takes a few years for King to create another breakthrough hit like Candy Crush Saga, I'm bullish on its chances to consistently grow the revenues it makes from that game in the meantime. In fact, compared to Rovio / Angry Birds, it's only begun scratching the surface of how such a popular game can make serious money (merchandise, animation, movies, etc.).
Only 4% pays for Candy Crush Saga extras today? I look at that and I see massive potential for growth, considering the mobile game is so young. Even a small increase would have a serious impact.
Look, people have been calling Google a one-hit wonder from before it went public almost ten years ago. Its market capitalization has grown from roughly $23 billion at the time of its IPO to $397 billion by January 2014, while Google's search and advertising business (its Candy Crush Saga if you will) remains its bread and butter by a margin.
It may not be the best of analogies, but you can claim the same of Surowiecki's comparisons with Guitar Hero maker Harmonix, Flappy Bird and Disney. The mobile gaming industry is relatively new and constantly evolving, and it's very hard to predict what will happen in the next few years.
That's a genuine risk, but also an opportunity. Surowiecki is right to advise King to "enjoy it while it lasts", because there's no telling how long it could last.
One-hit wonders are tricky bets. But not always bad bets.
Featured image credit: Dolphfyn / Shutterstock
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