Is King Digital Entertainment (KING) The Worst IPO Of The Year?

| March 28, 2014 | 0 Comments

Candy Crush SagaIf you’ve been waiting anxiously for the IPO of King Digital Entertainment (KING), you were in for a big disappointment this week.  In fact, in percentage terms, the KING IPO was the worst of the year so far.

King’s IPO was priced at $22.50, right in the middle of the expected range.  However, the stock traded down to $19 on its first day of trading, losing over 15%.  That’s surely not the start the company (and bankers) were looking for.

Here’s the deal…

KING is mostly known for its immensely popular Candy Crush Saga.  The mobile game is one of the most popular games of all time, in terms of number of users.

However, investors are clearly worried that KING is a one-trick pony, much like its heavily-maligned competitor, Zynga (ZNGA).  Now, ZNGA did have more than one popular title at the time of its IPO, but it was entirely reliant on Facebook as a gaming platform. 

Not long after the IPO, Facebook gaming really began to lose steam.  ZNGA shares fell well below the IPO price and have yet to recover.  However, most analysts were concerned about ZNGA’s valuation and revenue model from the start. 

Meanwhile, KING is priced at a significantly more reasonable level… and it’s not even close.

At around $19 per share, KING is valued at just under $6.5 billion.  That’s 3x revenues and just 11x trailing earnings.  ZNGA has no earnings at all to speak of, and even after losing so much ground, is still priced at 5x revenues.

Moreover, KING’s Candy Crush is still doing remarkably well with an eye-popping 1.4 billion plays per day.  And, unlike ZNGA, Candy Crush is all about mobile play – not Facebook.  Mobile gaming is still in its high growth phase as more and more people become owners of smartphones and tablets.

And that’s not all…

KING’s newer games, like Farm Heroes, are really starting to pick up players as well.  The company doesn’t have to have a Candy Crush-like hit in order to be successful.  Developing several moderately successful games will more than justify the current value.

In other words, while KING may have started off with a whimper, it could very well follow up with a bang

This company is not ZNGA.  And while there’s certainly some risk given the large percentage of revenue coming from one game, there are plenty of reasons to believe the company can diversify its revenue stream over time.

It will be interesting to see what happens when options come out on KING in a few weeks.  Often times, the options market is where the smart money action is.  Personally, I won’t be surprised if that action is mostly bullish.

Yours in Profit,

Gordon Lewis

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Category: Breaking News

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.