When it comes to mobile games, King Digital Entertainment (KING) is the mega player in the space. But this hasn’t helped the company’s IPO. In today’s trading, the shares are off by an ugly 11.5%.
Before the debut, there were already signs that the KING IPO would be soft. Unlike other offerings — such as Facebook (FB) and Twitter (TWTR) — the deal saw no increase in the price range. All in all, it was a classic sign of tepid demand from investors. Oh, and the King IPO was priced at the midpoint of the $21-to-$24 range — another mark against the offering.
Now, it’s true that the company’s business has been extremely robust. The company’s flagship game, Candy Crush Saga, gets a whopping 97 million daily active users.
The financials have also been standout. Last year, revenues soared by 11X to $1.9 billion and net income came to $567.6 million. The company makes money primarily from in-app purchases, such as for extra game content, boosters and additional lives. About 4% of the user base makes such payments.
But for the King IPO, investors are certainly worried about whether the company can keep up the momentum. Keep in mind that Candy Crush Saga has been losing steam lately. In fact, this slump in popularity was mostly to blame for drop in revenues from $621 million in the third quarter to $602 million in the fourth quarter.
While King has been able to come up with other popular games — such Bubble Witch Saga, Pet Rescue Saga and Farm Heroes – they still account for a relatively small part of revenues — Candy Crush Saga represents about 78% of bookings.
Another factor that likely had a negative impact on the King IPO: Zynga (ZNGA). The company came public in late 2011 at $10 per share and now the stock trades at a lowly $4.61. Of course, the company was not able to make up from the flagging popularity of games like FarmVille.
Yet the King IPO is now at a reasonable valuation. Based on the current stock price, the price-to-sales ratio is about 3.5X and the price-to-earnings multiple is at 11X. Here’s how metrics stack-up to others in the gaming space:
|Glu Mobile (GLUU)||3.7X||N/A|
|Activision Blizzard (ATVI)||3.2X||21X|
|Electronic Arts (EA)||2.5X||N/A|
|Take-Two Interactive (TTWO)||0.74X||5.8X|
But investors should still be cautious. If the Candy Crush Saga game is on the decline, it could potentially be rapid. In other words, there could be lots of revenue volatility over the next few quarters … and this is probably why Wall Street is dumping stock today.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.