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Gamefly IPO by Jordan at Investing Blog

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So I’ve been going on and on, and on, about this company called Netflix. Well, there may be even a better opportunity in GameFly, a copycat Netflix for video game rental.

How GameFly Works

GameFly is built upon the same subscription model as is Netflix. Subscribers pay a fixed monthly price and can have games sent straight to their mailbox. When a subscriber returns a game, the next one on their list of queued videogames is immediately sent out.

It doesn’t take a genius to understand why this service is so popular. With most new releases earning a price point of $60, GameFly subsribers can instead rent the game via the service for fractions of the cost. Plus, since a beaten game is rarely paid twice, it makes little sense to buy a game new. Instead, gamers can pay as little as $8.95 per month and have one game out per month. Beat the game in under a month? That rental cost just $8.95, far cheaper than the depreciation of a new game in the same amount of time.

Going Public

Sequoia Capital is one of the biggest backers of GameFly, with holdings equal to more than 50% of the current company. GameFly is profitable, has a long list of subscribers, and is raking in the dough, so Sequoia is ready to cash out.

In just the first fiscal quarter of 2010, Gamefly posted sales growth of 20%, with average revenue per user just over $20 per month. Gamefly grew only 30% in all of 2009, but 20% in just one quarter of 2010.

This kind of growth is outstanding, and exactly the kind of company in which I’d love to invest. Total net income was $1.6 million for the quarter. (The quarter ended June 30, 2010.)

Future growth is obvious. At the end of its first 2010 fiscal quarter, GameFly had just over 400,000 subscribers out of 100 million US gamers. If only 10% of all gamers became a subscriber, GameFly would grow by 2500%, and profit margins will only thicken with increases in paying members.

Why I’m In

First, after all the success of Netflix, GameFly certainly has a chance to hit it big. Investors will agree, and this is one stock I can see doubling in the first year after an IPO.

Next, Sequoia doesn’t back bad companies. I’ll buy Sequoia Capital’s “sloppy seconds” all day long.

Third, they aren’t looking to raise a lot of money, just $50 million. This will pay off creditors, allow for acquisitions and general business development. The company spends about $16 million per year marketing its services, and it is most certainly paying off.

IPO 2010

The papers were formally filed with the SEC in February of 2010, and rumor had it that they’d go public by the end of the year. With 2010 coming to a close, we may have to wait until first quarter 2011, but by no means does that mean that I’ll be out. I’ll be the first one in!

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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