Candy Crush Saga is the by-all-accounts addictive video game. There are 93 million active daily users. It’s a pretty simple concept – players line up digital candies according to size and color, looking to match three or more candies.
The game may be booming, but the impending IPO of King Digital Entertainment, the company that sells Candy Crush, could prove more bitter than sweet for investors later this month. That’s because the reported value of the IPO, $7 billion or more, has a lot baked into the price. And, quite frankly, I’m not sure reality will wind up satisfying those expectations.
First, a bit about IPOs, and the current market environment. You’ve no doubt seen the “first day” traders that have rocketed 50%, 90% or more than doubled on the day their stocks have come public. In what is only the latest example, Castlight Health soared 140% on Friday, its first day.
Tech-related companies have been seeing an IPO resurgence over the past few quarters. PricewaterhouseCoopers said in its global tech IPO survey earlier this month that 4Q 2013 saw 25 tech IPOs globally, compared to eight in the year-earlier period. And that fourth quarter was an outsized one for the tech industry, contributing 49% of the year’s tech-related public offering proceeds. In terms of overall dollars, those 25 IPOs garnered $5.6 billion, more than 400% more than the year-ago period.
Can the trend continue? Of course it can. The tech IPO renaissance is tied at least in part to the improving US economy. Relatively low interest rates mean investors are likely to look to equity markets for better returns on their money.
So the stage may be set for King to see a real pop on March 26th, the day it is scheduled to debut with the ticker “KING” on the New York Stock Exchange. The company will sell more than 15 million shares to the public and selling holders are offering an additional 6.7 million shares. At the high end of the reported $21-$24 range in which the company expects to price the shares, that could mean as much as $532 million in proceeds.
For investors considering owning King shares right out of the gate, it’s important to step back from the IPO excitement and examine the business model. Yes, the revenue growth is impressive.
Actually, it’s staggering: from $22 million in the first quarter of 2012 to more than $600 million in the fourth quarter of 2013. And for all of 2013, the company recorded $568 million in net profit on revenues of $1.9 billion. That 2013 profit is leagues more than the roughly $64 million in total revenues the company logged in 2011. At the same time, the company’s total monthly active user base grew from 30 million at the beginning of 2012 to more than 400 million at the end of 2013.
But the fourth quarter results may hint at a few speed bumps in the road, which may in turn shake up a high-flying, newly public stock. That single title, Candy Crush, accounts for roughly three quarters of King’s top line. According to the company’s S-1 filing with the SEC, two other titles, Pet Rescue Saga and Farm Heroes Saga, account for another roughly 20% of bookings. So all in all, just three titles make up 95% of King’s business.
That’s a little alarming given the slowdown that has just started to materialize – maybe it’s a blip, maybe it’s a longer term trend. From the third to fourth quarter of 2013, the monthly unique player tally slipped from 13 million to 12.1 million, while revenues slid from $648 million to $632 million. That’s the first sequential revenue decline the company has seen.
In the meantime, tough total users of the games has been on the rise, over that same period the company saw a decline in the number of paying users. The declines were tied to slippage in the total or “gross” bookings in the Candy Crush Saga game, which were only partly offset by gains in other titles.
Video games may be addicting but they are not essential. And to satisfy the hordes of avid gamers, video game companies must navigate the fickle demands of its audience with ever new, and ever “cool” titles. That’s not easy to do, as the fellow game company Zynga (ZNGA) has shown. That company, famed for its Farmville and Zynga Poker titles, has seen revenue declines in the mid-teens and has had to cut jobs to help margins. Zynga’s stock is down by roughly half since its 2011 IPO.
It remains to be seen if King will be a repeat of Zynga’s experience. But for now, investors would be wise to wait and see if there’s life beyond Candy Crush.