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King IPO Looks Like a Sweet Deal

Revenue growth has been off-the-charts for the maker of Candy Crush Saga


King Digital Entertainment, which is the maker of the hugely popular game Candy Crush Saga, has filed for an IPO. The company plans to list on the NYSE under the ticker of “KING” and the lead underwriters include JP Morgan (JPM), Credit Suisse (CS) and BankofAmerica Merrill Lynch (BAC). However, the filing did not disclose the financial terms of the King IPO.

king-ipo-candy-crush-sagaFounded in 2002, King has truly become mobile gaming royalty. By the end of 2013, the company hit 128 million daily active users, who play a whopping 1.2 billion times per day. But King is not a one-hit-wonder. Besides Candy Crush Saga, the company also has other popular titles like Pet Rescue Saga, Farm Heroes Saga, Papa Pear Saga and Bubble Witch Saga.

The business model is to offer games for free and then collect money for in-app purchases, like virtual items. It’s not easy to pull off — only about 4% of the user base shells out any money. But King has a knack for creating addictive, challenging games that have social features.

The really exciting thing about the King IPO is the company’s financials. Revenue growth seems to be from another universe. From 2012 to 2013, revenues skyrocketed from $164 million to $1.88 billion. There was also a net profit of $568 million. For the most part, the key driver has been the tremendous success of the Candy Crush Saga franchise, which gets about 93 million players each day.

King’s performance has certainly put other big gaming players to shame. Just look at Zynga (ZNGA). During 2013, the company pulled in $873 million and lost money (hey, even the widely popular Flappy Birds game got only $50,000 per day!)

What’s also impressive is that King has been hyper efficient. During its history, the company has raised only $9 million in primary capital and the headcount is 665. Zynga, on the other hand, has raised over $1 billion and has over 2,000 employees (Supercell has only 138 employees but has raised hundreds of millions). So yes, the King IPO has an unbeatable combination: Huge revenue growth and tremendous cost efficiency.

Despite all this, there are some potential risks for the King IPO. First of all, the competition is intense. Venture capital has poured into the mobile gaming industry, as seen with companies like Kabam, Supercell and Wooga. And of course, there are also mega operators like Electronic Arts (EA), Tencent Holdings (TCEHY) and even Disney (DIS).

But perhaps the biggest issue for the King IPO is that it relies heavily on the Candy Crush Saga title. For Q4, it accounted for a staggering 78% of total gross bookings. So if there is a drop-off in usage, it could mean a deceleration of the growth ramp.

Unfortunately, this may already be happening. In the fourth quarter, revenues came to $602 million, which was down from $621 million in the prior quarter. King blamed the drop on a decrease in bookings for Candy Crush Saga. Just ask Zynga about the dangers of relying on a single hit.

Yet the company has been able to beat back the competition and remain dominant on the Apple (AAPL) app store and on Google (GOOG) Play. There has also been a strong business on the Facebook (FB) platform.

In other words, the King IPO should be one of the year’s hottest deals.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll 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.

Article printed from InvestorPlace Media,

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