Does Profit Even Matter? Investing Ideas from the Not So Secret Candy Crush IPO

James Dennin, Kapitall: Candy Crush maker King filed for an IPO. The company is already profitable, but will that be enough?

King Digital Entertainment is the maker of Candy Crush - the online mobile game which has turned into one of the internet's fattest cash cows. And this morning the company announced that they're going public. 

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King's leaders have been planning this for a while, filing confidentially last year as profits surged  over 7000%

King Digital is much, much more profitable than many of stocks that went public in 2013, particularly in tech, where the focus is usually on product or growth. King makes almost $2 billion in revenue, and have a net profit margin around $500 million. That dwarfs even some tech giants like  Amazon (AMZN), whose profit margin was less than 1% last year. 

And yet the IPO is still inviting skepticism, even more so than hot IPOs like Twitter (TWTR), because King makes pretty much all of its money off three games. And as the tale of Zynga (ZNGA) may suggest, one company producing two hit games is a little like hoping that lightening will strike the same place twice. 

Which raises the question: is profitability enough to court investors? Does it even matter that much?

We decided to look back at 2013's class of IPOs, ranking them based on the highest pops on their IPO day.  An IPO pop is the amount the share price rises on the first day, between the actual offering and the market's close. Typically, organizers shoot for an IPO pop of around 15%.

That's because there's a very tricky balance to be struck: you don't want too much of the money raised to go to investors, as the company needs it grow. That's why it's going public.

But you also need a pretty high return in order to incentivize investors toward IPOs, which are pretty risky investments. The public doesn't know much about these new stocks, and they don't have a proven track record. 

Investing Ideas

We decided to take that list of stock IPOs with the biggest pops on their first day of trading, and screen it for those already profitable early in 2014. Of the list of 15 companies, only two, Noodles & Co (NDLS) and Sprouts Farmers Market (SFM) have actually turned a profit. And they were slim ones, at 1.3% and 2.7% respectively. 

So we expanded our screen by looking instead at operating margin. Operating margin is similar to profit margin, in that it looks at the ratio between costs and sales. But it doesn't account for fixed payments like interest on debt. 

Just five of 2013's IPOs with day-one pops above 15% remained on our list, with operating margins above 1%.

Click on the interactive chart to view data over time. 

1.Cvent, Inc. ( CVT):A cloud-based company, provides various solutions for events and meetings value chain primarily in North America. Market cap at $1.15B, most recent closing price at $38.88.

Pop: 56.8%

Operating Margin: 1.3%

 

2.Tableau Software, Inc. ( DATA):Provides various business analytics software products in the United States, Canada, and internationally. Market cap at $5.79B, most recent closing price at $97.93.

Pop: 63%

Operating Margin: 1.6%

 

3.Noodles & Company ( NDLS):Develops and operates fast casual restaurants. Market cap at $1.11B, most recent closing price at $37.82.

Pop: 104%

Operating Margin: 3.1%

 

4.Potbelly Corporation ( PBPB):Owns and operates Potbelly Sandwich Works sandwich shops in the United States. Market cap at $96.74M, most recent closing price at $22.66.

Pop: 119%

Operating Margin: 3.8%
 

 

5.Sprouts Farmers Market, Inc. ( SFM):Engages in the retailing of natural and organic food in the United States. Market cap at $4.89B, most recent closing price at $35.0.

Pop: 122%

Operating Margin: 5.7%

 

 

( List compiled by James Dennin, a Kapitall Writer. Monthly returns sourced from Zacks Investment Research, all other data sourced from Finviz.)

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