The incredible run in the IPO market continued in Wednesday trading as Candy Crush creator King Digital Entertainment, trading under the symbol of KING, made its debut. The stock was priced at $22.50/share as the popular online game company raised half a billion dollars in the initial public offering, giving KING a valuation at just over $7 billion.
However, the stock was ‘crushed’ in early trading as KING was down roughly 10% at time of writing, while shares were briefly trading below $20 at one point too. The release of shares probably couldn’t have come at a worse time, as investors appear to be reconsidering momentum stocks in this environment. Plus, with Facebook’s (FB - Analyst Report) latest acquisition—this time definitely outside of their social media wheelhouse—concerns over a tech bubble are growing as well.
Another issue for KING is the company’s total dependence on the incredible success that is Candy Crush Saga. This puzzle game has been a huge hit and it actually accounts for nearly fourth-fifths of the firm’s total revenues, suggesting that this is really a Candy Crush IPO more than anything.
Out of Lives?
This is troublesome as some users are starting to move on from the game and are looking for other products, plus, it isn’t like we haven’t seen this before. After all, Zynga (ZNGA - Snapshot Report) saw great initial success with games like FarmVille and Words with Friends, but these have clearly passed their prime.
And much like Zynga—among others-- King has had trouble in replicating the success of its top game, leading many to believe that KING is another Zynga in the making. This isn’t exactly a compliment, as ZNGA is down over 50% since its debut several years ago.
Sweet Returns Possible?
However, there is some reason to be hopeful for KING in the near term. KING currently trades at a big discount (from a price/projected sales ratio look) when compared to its peers. KING has a P/S valuation of roughly 2.9, compared to 5.1 for ZNGA, according to Bloomberg.
More importantly, KING is actually profitable, something that investors cannot say about ZNGA. Due to the huge success of Candy Crush, and the high level of in-game purchases by users, KING has a pre-tax profit margin around 30%, so it might be able to crush it this year after all.
While I think that the dependence on Candy Crush is very worrying, I feel that there are some huge differences between KING and ZNGA. The profitability of KING being the biggest difference, and the solid valuation for KING compared to its peers.
Thanks to this, KING might be as terrible as some think, especially if they can find a way to push out other popular games later this year. Furthermore, ZNGA actually has a Zacks Rank #2 (Buy) right now, while another mobile game maker, Glu Mobile (GLUU - Snapshot Report) has a Zacks Rank #1 (Strong Buy).
To me, this suggests that there is decent sentiment behind the space, and that the industry is pretty well-positioned in the short term. And given that KING is arguably better positioned than most in the space due to its profitability, it could be the king of the group.
Undoubtedly trading will be volatile though, as there are definitely some concerns that are starting to develop over the broad tech sector and even if a bubble is forming. But if you are looking to get in on the mobile gaming space, KING could be one sweet pick for investors.
What About You?
Do you think that King Digital Entertainment is the top dog in the space? Or do you believe that it doesn’t even matter and that the whole sector will be in serious trouble (again) before long?
Let us know in the comments section below!
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Author is long FB