Mad Money

Most hideous IPO ever: Cramer's warning

Pedestrians walk past a King Digital Entertainment banner on the facade of the New York Stock Exchange in New York.
Jin Lee | Bloomberg | Getty Images

While the market is calling investors to circle back to certain stocks, Jim Cramer thinks it is time to talk about the most hideous IPO in recent memory. He considers it to be a truly untouchable stock, something that no one would want to own.

King Digital, the mobile game developer behind such games as Candy Crush, is considered by many to be the most disappointing and overhyped deal of the year.

Since King went public, it has been crushed. When it debuted on March 25, it traded at $22.50 per share, and it now trades at about $11 per share.

"I say they should rename the thing Pawn Digital, and you need to move on before they unleash the selling hounds," added Cramer.

What happened that so many analysts were so mistaken about the stock?

Cramer thinks that the big error analysts made was comparing it favorably to Zynga, another overhyped social gaming stock that went public in 2011 at $10, crashed and burned and now trades around $2.

They were comparing apples with candy—two completely different things.

The "Mad Money" host added that they thought since King Digital was cheaper than Zynga when it went public, that it had to be a win because King Digital's numbers looked better than Zynga's.

"Here's the problem with that kind of analysis: Zynga was just a total disaster," said Cramer.

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"Hey, it's better than Zynga" could apply to almost every publicly traded company out there that's not in imminent danger of going bankrupt. But essentially, if that's your bullish thesis, that's no reason to buy.

The other problem with King was that it was a one-trick pony, in Cramer's opinion, because 78 percent of its revenues came from the one game, Candy Crush. In addition, management hasn't given any visibility into 2015, which Cramer interprets as meaning they don't have a handle on the company's future.

Most of the analysts who were positive about King Digital downgraded the stock, and now the stock trades just 6.25 times next year's earnings. But be careful, Cramer warns.

"In my view, that doesn't make King cheap, it makes it a value trap," he said.

Cramer recommends additional caution, because a lot of the stock is locked up until the company reports its full-year results in 2014. That could be a giant tidal wave of selling that will hit once the extended lockup ends in four months.

"It will be ugly, and there's no way this stock can bottom until the insiders have a chance to sell."

Call Cramer: 1-800-743-CNBC

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