With news that Candy Crush game-maker King Digital Entertainment has filed to go public, many media pundits are discussing it in relation to another game maker, Zynga (ZNGA). Often, folks make unfavorable comments about Zynga, and I have a few problems with this.
To hear people talk about Zynga, you would think they were always extremely bearish about the company. The trouble is, none of them ever said a negative word about Zynga at the time of its initial public offering, when it was described as a new kind of gaming company. People seem to forget, but it grew incredibly fast for a gaming company, going from nothing to a multi-billion dollar concern in just a couple of years.
Zynga founder Mark Pincus smartly saw the opportunity to hitch a ride to the growing popularity of Facebook (FB) and leveraged this partnership to the max. This had never been done before in gaming. It was amazing how it led to a $12 billion company at its height in such a short time.
Of course, it also led to Zynga growing super fast, hiring anyone it could find to keep up with the growth and missing the shift to mobile. But to say that it was always obvious that Zynga would fail isn't accurate.
It's also not accurate to say that Zynga only had one real hit, the way King does. Zynga had a good five blockbuster games and many other less successful but still profitable ones. So, they had the capability to develop a hit game, it's just they've gone a very long time since their last big hit.
The folks who talk so dismissively now about Zynga suggest that it will never be able to succeed. They overlook its potential for growth. It doesn't matter that it fell to $3 from $15, all that matters is where it's going. At this lower valuation, one hit will send the stock rocketing.
I'm not eager to own King Digital. Candy Crush is an amazing game that has single-handedly made this company worth as much as $7 billion. Although its growth is slowing, King will make money from Candy Crush for a long time. But it certainly feels as if its venture-capital backers want to get their money out now, before the growth story goes away. While King Digital has been working on a couple of follow-ups, it has yet to show it can replicate Candy Crush's success.
It's a solid company, however, and I would be interested in owning the stock at a more discounted level. Making hit games is not a random flash in the pan. The best companies know how to follow certain formulas to increase their chances of success, just like music, TV and music executives have known for decades. King will have another hit in the future, but I'd rather wait until then to own it.