Are Candy Crush Saga's best days already behind the company as it prepares for its IPO? If history rhymes, then the answer is unquestionably, YES. Investors beware.
This author was listening to a stock market oriented, AM talk radio show hosted by Peter Schiff. Mr. Schiff and his guest, the name escapes me, were musing over the market and what Candy Crush's IPO means in terms of proximity to the top.
Schiff was sort of thinking out loud about his gaming habits and the life cycle of his interest, which got iStock to thinking… is there a natural life lice cycle for popular online/app games? A way to measure or illustrate the public's interest?
The answer is yes. One of our favorite resources we use to measure the public's interest is Google Trends' Search Volume Interest (SVI). The next step is to compare Candy Crush to similarly popular games from days gone by. The two that came to this app/game challenged author's mind were Farmville and Angry birds.
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So, we went to Google Trends to see if there were any similarities between the three games and their SVI cycles. Bingo! It just jumps off the page: a vertical rocket ship rise, followed by steady decent, sort of like a piece of paper caught in the wind.
See for yourself on this Google Trends chart.
Source: Google Trends
Of course, the King Digital Entertainment company apologists i.e IPO underwriters will tell investors not to worry, everything with the company's flagship title, Candy Crush, is a OK, but let's look at King's Form F-1 Registration Statement to see if financials mirror Google Trends.
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According to the registration document, monthly unique payers (MUPs) fell from 13.012 million in Q3 2013 to 12.165 in Q4 2013 – a 6.5% decline. Not surprisingly, quarterly revenue followed MUPs' path. Sales dropped 3.1% to $601,715,000 for the quarter ended December 31, 2013 compared to $621,196,000 for the three months ended September 30, 2013.
Based on SVI, it would not be surprising to see MUPs and revenue track lower in the first quarter of 2014, as well. Considering early reports that King Digital will have a market cap of $7.6 billion at the IPO price, take on the average IPO price pop of 40%, and Candy Crush could have a market value of close to $11 billion on public day one.
That would mean King could trade at 5.83 times 2013's revenue of $1,884,301,000; however, that could be the high water mark as evidenced by SVI and falling quarterly revenue. That being said, despite all of it woes, Zynga Inc (NASDAQ:ZNGA) currently trades at 5.36 times sales, but the average peer's price-to-sales (P/S) ratio stands at 2.52 (which happens to be close to ZNGA's low of 2.4). Overall: SVI's illustration of the life cycle for online games/app and corresponding, declining sales, suggest the best days for Candy Crush are in the rearview mirror: better hurry up, price that IPO, and get to trading, before Candy Crush gets crushed.
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