April 17th, 2014
by Ella Mason
King Digital hopes of a successful IPO were "crushed" after the social gaming company's shares dropped 16% on the opening day. King Digital, maker of the popular social game "Candy Crush" had high expectations. Unfortunately, the shares, which opened at $22.50 finished the day at $19.
Pricing Of The IPO
King Digital raised $500 million for its debut. At $22.50 shares were priced in the middle of the valuation range. This suggested a value for the entire company at over $7 billion. The setting of the IPO at a price at $22.50 indicated that demand for the shares was neither overly strong nor weak.
Reasons For The Unsuccessful IPO
The core problem was neatly summed up by analyst Scott Sweet who referred to King Digital as a "one trick pony." While King Digital has a portfolio of over 180 games very few of them have proved as popular as their flagship title Candy Crush. In fact King Digital's top three games Candy Crush, Farm heroes and Pet rescue made up 95% of total sales for the fourth quarter of 2013.
There are serious concerns that King Digital will be unable to repeat its winning formula and release more popular games. Analysts point to Zynga who has struggled to repeat the success of its games Farmville and CityVille.
Overview Of King Digital's Financials
Many commentators were optimistic about King Digital debut. After all, unlike some tech companyies King Digital is highly profitable with $560 million in profits on revenues of $1.8 billion in 2013. This was up from only $8 million in profit on $164 million in sales in 2012.
In addition its games are played 1.2 billion times a day and the company has 128 million daily users.
What This Means For The Tech Industry
Despite the relative lack of success of the King Digital IPO this probably does not spell the end for the boom in tech stocks. According to Dealogic there been 60 IPOs already this year. This is the most IPOs since 2000 which experienced 125 for the same period. There are also some major upcoming IPOs including cloud computing companies Box and Dropbox.
Conclusions From The King Digital IPO
The relatively unsuccessful IPO for King Digital appears to suggest that on balance investors lacked confidence that the company would be able to repeat its success with Candy Crush. The fact that 76% of total sales were derived from this one game was simply too much risk for many people. If the company does actually fail to deliver revenue growth we can expect to see the company's price drift down even further.
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About the Author
Ella Mason is a freelance writer.