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Just moment ago, at 10:00 am EDT, the rush for Candy Crush began as King Digital Entertainment (NYSE:KING), the Lond0n-based computer game maker, floated its IPO on the New York Stock Exchange at a price of $22.50. Within a mere five minutes the share price dropped almost 10%. This could turn out to be the bumpy ride that many have predicted.
I don’t play Candy Crush. In fact, I don’t play any digital games. I realize that the game is wildly popular. I stopped counting the requests I have received to join the game long ago. It’s not that I am a bore – just ask my friends. (Both of them will tell you the same thing.) It’s just that I don’t see any lasting value in it. That may be why so many investors are so bearish on both the IPO and the aftermath.
At $22.50 per share, the offering of 22.2 million shares, would value the company at $7.0 billion. Some 6.7 million of the shares are being sold by current shareholders (it’s really 6,666,666, but there’s something about that number that seems a bit ominous), who are hoping to garner a tidy sum of $150 million collectively. Over 17.8 million shares have been sold in the first 20 minutes of trading and, it is beginning to appear that those shareholder may only gain a meager $135 million.
Regardless, it will still be a handsome payday. What it turns out to be for buyers remains to be seen. Buyer enthusiasm aside (people are attracted to color and light), the major concern is that, as an investment, King has wobbly legs at best. Those buying in seem to be doing so based on past performance, and we all know the warnings about that. Just because revenues nearly tripled from $64 million to $1.8 billion from 2011 to 2013, that does not mean that kind of performance is going to be replicated in the future.
Candy Crush, the poster child for King, is not just visually attractive, it is attractive because it is free. It was, in fact, the most downloaded app in 2013. Candy Crush alone generated 78% of King’s $1.9 billion in revenues last year. All of that revenue was generated by click-throughs by users in response to advertising on the site. That’s a lot of eggs in one basket. The only thing worse than having all your eggs in one basket is having all those eggs coming from the same chicken. That is exactly the scenario with King Digital. As Michael Hewson of CMC Markets said, “If King can’t come up with an equally popular sequel or another similarly popular game then the risk is we could see it go the same way as Zynga. The key drivers will therefore be the company’s ability to come up with new compelling game offerings for a demographic that can have a low boredom threshold as mobile device usage continues to rise.”
Right there lies the entire story. Some people will buy because of the pizzaz of the past. More will stay away because they understand that, at some point, the hen is going to croak to cluck no more.
The time now is 10:49 am EDT and KING is trading below $20.00 as the 22.2 million shares have been consumed and activity has slowed to a virtual crawl. The major damage for the day has been done all in the time it took to write and post this story. The sugar rush is over.
