March 25, 2014
Candy Crush, King, IPOs and skepticism were going hand in hand just last week. So we decided to publish a couple of blogs based on our analysis of what might have actually gone down. There are still so many questions floating around. As Forbes and various other finance and news journals termed it, King’s IPO is due to be a one-hit wonder. So the maker is all set to prove to ensure that it doesn’t go the Zynga or Twitter way. Based on recent reports, King, which is offering 22.2 million shares at between $21 and $24 per share, is due to face great scrutiny by investors.
So here is our analysis of what might have gone down in brief:
Leisure games have slowly and steadily started translating into business games. The saga started way back in Dec 2011 when Mark Pincus led Zynga, with 227 mn monthly active users (MAUs) across 175 countries filed for an IPO and subsequently went public with $ 7 bn valuation at $ 10 / share. Zynga was the company behind the once highly popular Farmville, a game that has now faded from public memory. The stock won investors’ confidence and attained its peak in the vicinity of $ 15 / share in February 2012. It remained on a downward spiral since then and currently trades around $ 5.40 a share with over 40% decline from its stock market debut.
So why do you think King Digital decided to go the Zynga way? As can be seen from the numbers cited above, the downward spiral seems disheartening. So despite the odds, King decided to go public. What do they stand to gain? Read more to find out!
As mentioned above, Zynga’s fortunes turned against them. Will the same happen for King?
Based on public records, King Digital has only publicly announced one acquisition in its 10 year history: that of Fabrication Games, which was a Stockholm, Sweden-based mobile games developer with just 12 employees.
While there are indeed some grounds of similarity between Zynga and King Digital; there is a great amount of dissimilarity as well. While a generic comparison between the two is expected; King Digital definitely brings a better, transparent and profitable model though it has higher concentration. It sincerely proposes a better investment case than Zynga 3 years ago.
So, to see how King’s venture might end up being more profitable than Zynga’s, just follow the link to read about the various differences between the two and the odds might be in King’s favor afterall!
While a detailed financial modeling leading to DCF valuation should be done to arrive at the valuation, we have performed an abridged DCF valuation and relative valuation to see if the IPO is expensive. In this blog, you can find the same DCF valuation and consequent valuation.
The bottom line is that we feel the IPO of King Digital is one of the most appropriately priced IPOs in recent times in technology/ internet based entertainment space. It is 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.
So the saga of monetizing the leisure games still continues as King Digital Entertainment, the Irish parent company of the mobile game Candy Crush filed for an IPO in March 2014. Ironically, it was King’s Candy Crush that replaced Farmville as the most-played app on Facebook. To me, it seems the story of converting survives the investment tests if it has a strong business model. The model of billions of games played in the virtual world converting into billions of dollars in the real world is here to stay.