Should You Be Excited About King’s Upcoming IPO?

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On Tuesday, the maker of the Candy Crush Saga, King, filed a public F-1, meaning a near-term IPO is all but certain. Yet, given the premium it's bound to command relative to leaders Activision Blizzard (NASDAQ: ATVI  ) , and the collapse of Zynga (NASDAQ: ZNGA  ) , should investors have any interest in this IPO?

What's in the F-1?
The information in the F-1 of a company provides you with everything you need to know of its past and current fundamental performance. For King, the company had a breakout year in 2013, with bookings (translated into revenue) growing 11 fold to $1.98 billion, and generating a net profit of $567.6 million.

This explosive growth was possible thanks to the success of Candy Crush, a game that now accounts for almost 80% of the company's total bookings, and largely responsible for the one billion games played per day in the month of December.

So what's the problem?
While King is its own company, haven't we played this game before, with Zynga, a company that was worth more than $11 billion shortly after its IPO in 2012, but now worth just $4 billion.

Zynga went public having the success of its Farmville franchise. In 2011, the company reported $1.14 billion in revenue, but lacked profitability. Therefore, King is both larger and profitable, meaning a $10 billion valuation would not be unprecedented.

King is reportedly looking to raise $500 million, which it will likely earn, but despite this fact, investors should have serious reservations regarding whether or not to invest. Because like Zynga, its success is based solely off one billion dollar franchise. Also, there are already early signs that Candy Crush may be losing its appeal.

For one, King saw seven consecutive quarters of growth, driven mainly by Candy Crush, but during this last quarter its bookings fell nearly 3% quarter-over-quarter to $632 million, and its monthly unique players fell an even worse 7% to 12.2 million.

Combined, this could signal that King's time on top with explosive growth could be nearing an end, because like Zynga, once momentum starts to fade with these game companies, it often occurs rapidly and often without warning.

Let's get reasonable
With that said, a $10 billion valuation based solely off the success of one franchise is utterly ridiculous, especially when we've seen this play out with Zynga. Today, Zynga continues to struggle to find consistency, as its revenue has fallen in each of the last five quarters.

Therefore, investors looking to profit from the gaming space might find the likes of Activision Blizzard more rewarding. And while the company isn't quite as entertaining or exciting as King, it is larger and consistent with a wide array of games for consoles, smartphones, and boards.

Furthermore, Activision has two billion dollar franchises, and according to the company, its new game Destiny, scheduled for release in September, will likely be its third billion dollar game. Therefore, with this kind of brand power, and nearly $5 billion in trailing 12 month sales, Activision offers diversity and growth – thanks to Destiny – for a market cap of less than $15 billion.

In addition, a small company like Glu Mobile (NASDAQ: GLUU  ) might be appealing, a company with eight games offered on iOS, Android, Amazon, and Mac. Now, Glu Mobile isn't some massive company – has a market cap of only $385 million – but is growing fast thanks to successful games like Deer Hunter, Motocross Meltdown, and new releases such as Robocop.

In its last quarter, sales grew 62% to $42.8 million, which is created through app purchases. However, as the research firm Cowen recently noted, Glu Mobile is now ready to monetize its business via ad sales, which could spark growth beyond 30% expected in 2014.

Thus, given Glu Mobile's under-the-radar stature, its growth, and opportunities, it might prove to be a nice investment in the gaming space.

Final thoughts
Clearly, King faces an uphill battle, and at this point, to invest in the company is to believe that Candy Crush can maintain its popularity long-term. But in reality this just isn't likely, as games have a tendency of losing their appeal, as gamers are quick to move on to the next cool franchise.

Thus, for a company valued solely off the success of one game, investors would be taking a huge risk in assuming that it can continue to produce blockbusters, which will be required to maintain its $10 billion valuation and create further value.

Instead of taking this risk, which includes the possibility to relive the Zynga ordeal, investors will likely find Activision or Glu Mobile to be significantly more rewarding. More than likely, Destiny should serve as a nice catalyst in addition to the large business it has already established, and ad revenue combined with new games should spark continued growth for Glu Mobile. Hence, either presents less risk and perhaps more upside than the very speculative King.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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