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Zynga Inc (ZNGA), Facebook Inc (FB): Will Candy Crush Cause Cavities in Your Portfolio?

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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 SagaFarm 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.

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