Candy Crush IPO Investing
The Easiest Way to Game the Market
Editor's Note: Today's Energy and Capital comes to you from our energy and tech analyst, Jason Stutman.
Jason's been working behind the scenes here for awhile now, heading up our research department and alerting us to new trends and new opportunities in the tech space...
His gift for picking stocks is absolutely outstanding. I can personally vouch for this, as his last call on Facebook (NASDAQ: FB) made me a ridiculous amount of money.
Today, we've decided to share his most recent tech pick with you.
"Don't write about Xbox. Our readers aren't into that kind of thing."
That's what I was told when I first started writing for Energy and Capital.
Wealth-seekers and hard-working capitalists (who probably don't like video games) — that's our customer demographic, more or less.
If that's not you, you can stop reading now.
Or maybe it doesn't really matter...
Personally, I'm inclined to agree with the latter.
See, I don't care about your age. I don't care about your gender. I'm not concerned with the color of your skin, your salary, or what you ate for dinner last night... and frankly, I don't care whether or not you like to play video games (after all, according to our data, you probably don't).
All I really care about is helping you make money.
And today I'm going to share with you one of the most mouth-watering tech plays I've ever come across in the video game space.
Now, I understand that you could probably care less about the latest video game craze. But I'm willing to bet that in about three minutes, you're going to become a huge fan...
Because this particular game is about to make us all incredibly wealthy.
About a month ago, I told Energy and Capital readers that Facebook (NASDAQ: FB) was undervalued.
Shares were trading at $24.66 when I made my claim. As I write this, shares are trading at $35 — a 42% gain in about 30 days.
I mention this not to chest-pound, but instead to drive home a point...
You see, I'm not a Facebook fan. In fact, I believe social media is socially debilitating, not to mention studies show it can make you depressed.
But my opinion on Facebook as a service is entirely separate from my analysis of Facebook as a company — just as my opinion on video games is entirely separate from my analysis of the IPO I am about to tell you about...
I grew up playing Super Mario Brothers at my Grandmother's house in Massapequa, New York, while my mother tirelessly waited tables to keep our family fed. As a child who moved around a lot, friends were hard to come by. Video games kept me entertained. And so, I have found joy in playing them since I was a kid. (My coworkers will attest to this; even my ring tone is Super Mario-themed.)
When it comes to the market, however, I recognize that video games are absolutely laughable.
Let me show you what I mean...
The chart below shows five prominent players in the video game space compared to the Dow Jones Index (DJI) over the last two years.
Included in the chart are Nintendo (OTC: NTDOY), Electronic Arts (NASDAQ: EA), Konami (NYSE: KNM), Zynga (NASDAQ: ZNGA), and Activision (NASDAQ: ATVI).
(Note: I have excluded Microsoft and Sony for two reasons: neither is a pure play; and both are console producers, not game publishers.)
The majority of those lines hover in negative territory, with only one showing present gains.
For a bit of perspective, that green line — the only one on par with the DJI — is Activision Blizzard, Inc., publisher of World of Warcraft, Call of Duty, Guitar Hero, and a slew of other best-selling games.
Of the top 10 grossing video games of all time, Activision Blizzard accounts for about 68% of that revenue. In other words, the best video game pure play out there is only on par with the overall market.
So, why would you ever buy shares of a video game company?
Let's take another look at that chart, particularly the red line...
That red line represents Zynga, publisher of once-popular gaming apps Farmville and Words With Friends. If you've never played those, don't worry... neither have I.
What's important here is the psychology behind gaming applications on social networks.
You'll notice that despite having the greatest losses (about 75%) on that chart, Zynga also experienced the highest gains (about 55%) at one point. And those gains occurred in just two months.
But the fact is Farmville and Words With Friends quickly lost their popularity. And when investors realized that Zynga didn't have anything else up its sleeve, they ran for the hills, absolutely punishing the stock.
Ride the Hype
As a whole, the gaming market has an incredibly low attention span. No one wants to play the same thing over and over again.
It's the same with any form of entertainment... If someone asks you to see a movie that you've already seen, you're probably going to decline or suggest something else.
So when trying to value an entertainment company like a video game publisher, investors must determine its ability to continuously produce hits. If there isn't a proven track record of continuous hits, the stock is not a solid long-term play.
But that doesn't mean there's no way to profit.
And that brings me to Midasplayer International Holding Co., maker of the single most popular Facebook gaming app, Candy Crush Saga...
Midasplayer, also known as King.com, has recently hired JPMorgan Chase & Co., Bank of America Corp., and Credit Suisse group AG to prepare for an IPO.
I won't go into the specifics of how the company's most popular game is played, because, quite frankly, it doesn't matter.
What does matter is how well the game is monetized.
Unlike Zynga, Midasplayer's revenue strategy is actually profitable. According to the UK's Telegraph, Midasplayer is looking at a revenue stream close to $530 million annually.
The important thing to note here though is that this is up 300% from last year — a jump almost entirely attributable to Candy Crush Saga. Midasplayer has been in business since 2003, meaning that in a decade of publishing video games, Candy Crush has been its only major hit.
Current valuations of Midasplayer are being dragged upward as a result of a temporary boost in revenue. This will initially bring out the bulls, but as Candy Crush inevitably loses popularity, Midasplayer will quickly lose its significance as a publisher.
All of this means you can play Midasplayer's IPO three ways:
- Ride the hype. Midasplayer's valuation will be inflated due to revenues from Candy Crush. This is likely to result in a bubble, as happened with Zynga. Buy shares while the game is still popular, and exit your position when you see bearish indicators. And, though unlikely, if Midasplayer manages to pump out another hit, the stock could actually end up being worth holding.
- Go long on a put. When Candy Crush Saga fades in popularity, Midasplayer shares will fall — unless it's able to produce another hit. However, chances are this won't happen.
- Sell short. Note that you will need to wait for your brokerage to establish an inventory after the IPO before you can short the stock.
Remember, the market isn't always rational — and this especially true when it comes to highly-publicized stocks and IPOs.
Generally speaking, you are going to find more "dumb money" in social media and gaming spaces than you would in, say, a semi-conductor or biotechnology company... And when dumb money floods the market, it's often easy to take advantage of.
Simply put, informed investors like you will have an edge on the herd mentality that comes hand in hand with companies like Midasplayer International.
Investing is a game. Play it to win.
Turning progress to profits,
Energy and Capital's tech expert, Jason Stutman has worked as an educator in mathematics, technology, and science... Before joining the Energy and Capital team, Jason served on multiple technology development committees, writing and earning grants in educational and behavioral technologies. Jason offers readers keen insights on prominent tech trends while exposing otherwise unnoticed opportunities.