Don’t Get Crushed by This IPO

The mass media obviously has a hand in reinforcing the feedback loop that inflates bubbles and keeps them alive. Take the Bitcoin bubble as one example.

I got a text this mornrning from a friend who has no understanding of the markets and no interest in bubbles. The text included a link to an article entitled: First U.S. Bitcoin ATMs to open soon in Seattle, Austin.

And my friend commented: “What?! Thought this had thoroughly played out by now.”

Obviously unconvinced that Bitcoin is anything more than a passing fad… a joke… my friend seemed genuinely perplexed why we’re still hearing about it at all.

I replied, as I often do when people forward me crazy-stupid news articles: “Ad sales.”

The media will print anything if it’ll lead to advertising sales. The merit of the article, or idea behind it, is secondary at best.

As media — particularly social media — has increased its reach and interconnectedness with global consumers, viral trends are easier to start than ever. But when longevity is lacking, those bubbles go bust just as easily.

Along with bitcoin ATM articles, the viral mobile game Candy Crush is all over news feeds today, as its parent company, King, has filed the paperwork to begin an initial public offering (IPO).

The company is already raking it in.

It generated $632 million in revenue last quarter, representing year-over-year growth north of 750%!

An IPO theoretically gives the company access to growth capital (and, of course, the company’s founding shareholders a chance to cash out).

Yet, IPO buyers might be sorely disappointed, as this game maker looks more like a one-hit wonder than a long-term profit generator.

Simply put: Online games are fads. They come, they go.

And we’ve seen it all before. Here’s a chart tracking Google searches of popular online games of the past:

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As you can see, most games enjoy a period of exponential growth… followed by a collapse in interest.

Why should we expect Candy Crush to be any different?

Worse still, most game makers realize there’s a small window of opportunity to capitalize on their game’s popularity. That’s why they launch IPOs as quickly as they can.

Often, the IPO coincides with the peak of the game’s popularity, leaving IPO investors holding the (worthless) bag.

That’s what happened to early investors in the Zynga (Nasdaq: ZNGA) IPO. Shares opened at $11 a share, traded as high as $15.91, then dropped to just $2.09 less than one year later.

Some investors lost as much as 86% of their money betting that Zynga’s popularity had legs, when it clearly didn’t.

Don’t be surprised to see the same performance from King’s IPO. The company relies on Candy Crush for 78% of its revenue, so investors can expect to get crushed once the sugar high wears off.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.