Chukong, top mobile gaming operator in China, is prepping for an IPO in the U.S. market in yet the latest sign that the gaming industry is heating up, and that investors are starting to forget about Zynga’s (ZNGA) disastrous deal.
Chukong is a fairly young company, having only gotten its start back in 2010. Naturally, it has a mobile-first focus, and it currently is benefiting from a breakout hit game called Fishing Joy that currently boasts more than 200 million users.
It’s not clear how much revenues the company generates, but if a game makes the top of the charts on app stores, it is likely to bring in a nice haul. Just look at King Digital Entertainment, which is the maker of Candy Crush Saga game (with 93 million players each day) and itself recently filed to go public. King is enjoying a net profit of $578 million on revenues of $1.88 billion (and those revenues grew from a mere $164 million just a year prior).
The Chukong IPO should benefit from the fact that Chinese Internet deals have performed spectacularly of late, with investors all but forgetting accounting scandals of the past. Stocks like 500.com (WBAI) and 58.com (WUBA) have rocketed by triple-digit percentages in mere months.
The flip side, however, is that this sudden boom in Chinese IPOs might attract a glut of deals that could muddy the waters and spread attention too thin.
This week, Sina (SINA) indicated it plans to spin off its Weibo microblogging site. Then there is JD.com, which is likely to raise $1.5 billion in its own offering. And looming on the horizon is a potential multibillion-dollar deal from Alibaba … though the “when” of that one is in the air.
Investors should also be concerned about the gaming space too. The industry is overly hit-driven; for instance, 78% of King’s total gross bookings come from Candy Crush Saga. So if the growth slows down on that single game … well, King will need an answer to make up for it, and quick.
And as Zynga has shown, answers don’t come quick.
If a gaming company is unable to diversify past a couple hits, and one of those hits loses popularity, the consequences can be severe. Again, Zynga is a prime example. ZNGA currently is off about 48% since its IPO in late 2012; over that same time, dot-coms such as Facebook (FB), LinkedIn (LNKD) and Pandora (P) have soared.
Given all this, it should be no surprise that a Chukong IPO is on the fast track — like other gamers, they want to get theirs as soon as possible. But while this could be good for the company, it could bring pain to investors.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.