In-Depth: PopCap's Possible IPO - Analysts Weigh In

[Gamasutra editor-at-large Chris Morris examines PopCap's potential plans to IPO later this year, quizzing analysts from M2 and Arcadia on the pluses and minuses of a public Plants Vs. Zombies creator.] The news that PopCap Games is considering a public offering is the stuff that gets the money wonks of the video game industry all atwitter. An indie darling, who leveraged the try-before-you-buy shareware model into multiplatform success? What’s not to love? While you won’t find people betting against PopCap if the company does decide to make a formal filing with the Securities and Exchange Commission, that’s not to say every analyst thinks the move is necessarily the right one for the company. Let’s put a couple of things into perspective: First, nothing is necessarily imminent. PopCap has only said it plans to "look at" going public this year and will do so only if it makes sense. Second, despite what the naysayers might lead you to believe, 2010 really wasn’t a bad year for publicly traded companies in the video game space. Yes, EA shares fell 8 percent over the course of the year, and Majesco plunged 35 percent, but Activision saw its shares increase in value by 9 percent. Take-Two shares were up 18 percent. THQ gained 13 percent. Konami was up 17 percent. And Nintendo’s stock closed the year 18 percent higher than it began. So investors are still willing to bet on game companies. But the transition from a privately held developer/publisher into a public one usually results in some changes to the corporate culture – and that raises the question: Will PopCap’s titles suffer as a result? “I wonder if they go public if they start to lose some of the mojo they have right now,” says Billy Pidgeon, senior analyst of M2 Research. “How are they going to make the numbers to make shareholders happy? How do they grow? Do they buy other people?" "There’s a certain coherence in their content. They have sort of a Disney or Nintendo thing going on in that there’s a certain expected quality to their games. … I’d really be concerned about their growth strategy, as it could cannibalize the elements that have made them successful so far.” The company has certainly been successful. All Things Digital reports that in 2010, PopCap had revenues of $100 million - and is rapidly increasing its investment in the social media space (having hit the $1 million per month revenue mark in that genre in just two months). That financial success wouldn't be the only reason a PopCap IPO could turn heads. As the company grows its footprint in social games (it’s currently the sixth-largest developer on Facebook), a public offering could finally give investors a chance to cash in on the growing market. “I think there’s a painful lack of investment vehicles which provide exposure to some of the emerging online and social network forms of entertainment,” says John Taylor of Arcadia Research. “There’s only really a couple of small companies - like Glu Mobile and Gameloft. Otherwise, the companies that seem to be leading or have a pretty good position are either private – like Zynga - or buried in much larger companies so they barely move the needle.” While PopCap doesn’t have the sort of bottom line of other publishers, that’s not something that’s likely to bother potential investors. If it does choose to go public, PopCap will be seen as a growth company – one who has substantial potential to increase its standing in the industry. “Investors who focus on growth companies are looking for a narrow set of things,” says Taylor. “Among those is the promise of future earnings power. If these guys at PopCap are in the $100 million club, that ought to provide critical mass with a good enough valuation and liquidity to make this worth people’s while.” If there’s one thing analysts are downright bullish about, though, it’s the company’s management – and its focus. Taylor says he’s confident the team would be able to withstand investor pressures and keep the focus on quality. And Pidgeon notes that despite the company’s growing reputation, it still takes pains not to rush titles. (For example, there has still been no word about YetiTrain, despite the discovery of the trademark for the game almost 16 months ago.) “PopCap is moving conservatively and that’s good,” says Pidgeon. “They’re growing, but not too fast.”