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Candy Crush IPO Part III: The Valuation

March 21, 2014
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This blog is an extension of our blog on Zynga Vs. King Digital – Past vs. Present

A topic that sends shivers down my spine every time I encounter a technology based company is the valuation. While a detailed financial modeling leading to DCF valuation should be done to arrive at the valuation, we have done an abridged DCF valuation and relative valuation to see if the IPO is expensive.

You have been through our earlier post on this subject where we modelled the revenue drivers and revenue build up for this company. We highlight our key assumptions below for recall:

Exhibit 5 – Key Assumptions

We have used very modest assumptions about the revenue drivers to achieve over a period of five years:

  1. A monthly active user base of 0.5 bn from current level of 0.3 bn roughly
  2. A revenue base of $ 3 bn from current level of ~ $ 2 bn
  3. A decline in the GABPU from the current level of $ 0.063 to $ 0.054 primarily because Candy Crush Saga has started showing a decline in Q4 2013 from its peak level. We feel that it’s popularity has now got saturated and new games are required to sustain the current levels of user engagement. New games may not be able to fetch the current levels of GABPU. Even if Candy Crush Saga continues in the offering, GABPU will have to come down to increase penetration amongst active users.

The business model is not capital intensive, hence the model is not very sensitive to depreciation and capital expenditure assumptions.

Exhibit 6 – Abridged DCF Valuation

We have arrived at a pre-IPO shares calculation as below:

  1. Conversion formulae of the pre-IPO preference shares are complicated
  2. But what we know is total nos. of shares outstanding after IPO will be 314.9 mn as per statement from the company. A total of 22.2 mn shares are being offered in IPO. Of these roughly 6.7 mn shares are the ones offered for sale by Apax Partners. So the freshly issued shares will be = (22.2 – 6.7) mn
  3. So, total nos. of share outstanding pre IPO should be = 314.9 – (22.2 - 6.7) = 299.4 mn

A terminal growth of 3% - 5% is currently the most prevalent assumption in the markets. And a WACC of 10% - 14% adequately reflects the risks. However, we have done a sensitivity analysis of per share price ($) over these ranges:

Exhibit 7 – Sensitivity Analysis of per share price ($)

I think $ 21 - $ 24 fully prices the share at this stage. A discount of 5% - 10% on this range will definitely leave something on the table for retail investors to come in at this stage.
As far as relative valuation is concerned, we have compared the valuation of King Digital with internet / technology based social media / entertainment companies:

Exhibit 8 – Relative Valuation

  1. King Digital is very modestly priced at its current level if we look at the crazy valuation multiples market is assigning to the companies considered above.
  2. While we agree, the peer set may not be fully relevant, but even if we compare with Zynga alone, the company commands a higher valuation.
  3. A stark difference we must note at this stage is, the fact that some of the companies listed above are not even PAT positive while our company under consideration has been PAT positive since last two years. In 2013, it has reported a PAT in excess of $ 0.5 bn. This translates into a very modest P/E ratio of 15 against the crazy earnings multiple the peers have commanded.

So, to conclude, we feel the IPO of King Digital is one of the most appropriately priced IPO in the recent times in technology / internet based entertainment space. It’s definitely not overhyped like the IPO valuation of Facebook, Twitter or Zynga. And definitely nowhere in comparison to the valuation Facebook assigned to WhatsApp recently.

Please find attached our excel model to understand the detailed calculation of the numbers summarized in this blog. You can make your own assumptions reflect your thoughts in the model.

Do you have comments on our analysis? Feel free to share your thoughts with us!


About the Author

Shashi is a B.Tech from Indian Institute of Technology, Delhi and an MBA from Indian Institute of Management (IIM), Ahmedabad. With over 11 years of experience, he has dabbled in Project Management, Management Consulting, Investment Banking, Mergers & Acquisitions, Corporate Finance, Strategy Formulation and Fund Raising.


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