March 21, 2014
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:
We have used very modest assumptions about the revenue drivers to achieve over a period of five years:
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:
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
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!