Why Candy Crush maker's shares fizzled in market debut

Shares in King Digital Entertainment Plc fell as much as 16 percent in their Wednesday debut, underscoring investor concern about the company's reliance on "Candy Crush Saga" and dampening hopes that its coming-out party could revive investor interest in the mobile gaming industry.

Mobile game industry executives had looked to London-based King's IPO, the largest by a gaming company since Zynga Inc went public in 2011, to help sweep aside skepticism over a notoriously fickle, volatile market.

But King's shares fell to a low of $18.90 in afternoon trade from their IPO price of $22.50, which valued the company at about $6 billion.

Since Twitter's market debut in November, King's IPO was the largest U.S. tech IPO and the second-worst performing after textbook rental and academic service company Chegg Inc, which plummeted 23 percent, according to Thomson Reuters data.

The company offers over 180 games but its two-year-old "Candy Crush Saga" game, in which users move candies to line up at least three of the same color, accounted for over three-quarters of King's revenue for the last three months of 2013.

"Once you have a hit, it's hard to make a string of hits. How many bands were the Beatles?" Roger Kay, analyst at research firm Endpoint Technologies Associates said. "Also, there've been a lot of high priced IPOs and mergers and acquisitions (of late) and when valuations get frothy, investors get disappointed when returns don't measure up to expectations."

Candy Crush, a free game, is now a household name and has been downloaded more than 500 million times since its launch on mobile devices. Using the "freemium" model, King makes money by selling players extra lives and other add-ons.

King's dismal debut dragged down other gaming stocks on Wednesday. Zynga shares fell over 4 percent, while smaller player Glu Mobile slipped 4.5 percent.

When Zynga debuted in 2011 with about the same valuation as King, its stock ended down 5 percent on opening day.

"FarmVille" maker Zynga's market value has since shrunk to just over $4 billion, falling victim to concerns about the danger of investing in companies that rely heavily on a hit game.

"This was mispriced," Sterne Agee analyst Arvind Bhatia said of the King debut. "There are a lot of IPOs in the pipeline so investors are not starving ... and are being picky. Today's action also says investors are not going to ignore fundamentals."

King's shares closed down about 16 percent at $19.00 on Wednesday. JP Morgan, Credit Suisse and BofA Merrill Lynch were the lead underwriters for the offering.

There are some signs new titles from King's portfolio may be gaining traction. Analysts have pointed out that "Farm Heroes Saga" has seen momentum since its January mobile launch.

The title has since landed on the list of top 10 highest-grossing apps on Apple's iOS platform, but whether the game will prove to be a money-making title in coming months remains to be seen.

LONG-TERM RUN

Despite its first-day fizzle, the company's real test will be to convince investors that it can build a sustainable business.

"To us it's not about today but (a run) over the course of years and executing our plans," Hope Cochran, King's chief financial officer, said in an interview. "Having a stable group of global franchises is really what we’re focused on."

King sold 15.5 million shares of the 22.2 million offered, with the rest coming from stakeholders including private equity firm Apax Partners, which remains the biggest shareholder. King raised about $500 million in its IPO.

In February, King said an average 144 million daily active users played its games more than 1.4 billion times per day.

Unlike companies like Twitter that went public last year with no profits on their balance sheet, King has been profitable since 2005.

"Candy Crush," which was first launched on Facebook in April 2012, was released on Apple devices in November that year and on Android devices a month later.

The spectacular popularity of "Candy Crush" helped King generate revenue of $602 million in the fourth quarter of 2013, up from $22 million in the first quarter of 2012.

The stock's less-than-impressive debut will be noted by youthful rivals such as San Francisco-based Kabam and Kixeye, known for strategy games like "Kingdoms of Camelot" and "War Commander", which are looking to make market listings or secure new financing.

King has no debt and generated positive cash flow from operations for each of the last nine years. It posted profit before tax of $714.3 million in 2013.

Apax will retain a 44.2 percent stake in the company, if underwriters fully exercise their option to buy shares.

Chief executive Riccardo Zacconi, who has led King since co-founding the company in Sweden in 2003, will hold a 9.5 percent stake.

source: www.abs-cbnnews.com

Candy Crush maker in Wall Street debut

SAN FRANCISCO -- King Digital Entertainment raised a sweet half-billion dollars on Wall Street, and now it is time for the market to show its taste for the makers of mobile game Candy Crush.

The British game developer priced its initial public offering at $22.50 per share on the eve of the sart of public trading Wednesday on the New York Stock Exchange.

King will trade under the ticker "KING" with an opening market valuation of $7.1 billion.

The money raised in the issue could reach $574 million depending on demand for an additional 3.33 million that could be issued underwriters, the company said.

King's arrival on the stock market comes as investors are keen to buy into the next Internet rising industry star but wary of young companies being overvalued, especially in the world of games where popularity can be fleeting.

Established in 2002, King's business has soared in the last two years thanks to the spectacular popularity of Candy Crush Saga, which boasts some 97 million players worldwide.

The Tetris-like format requires players to line up sweets and bon bons through 500 increasingly difficult levels.

Addictive Candy

But the addictive qualities of Candy Crush, and the company's ability to monetize that by users on computers, tablets and cellphones paying extra to help them advance through levels, underpin the sky-high valuation.

The company says its games, which also include Farm Heroes and Pet Rescue, are installed on 600 million mobile devices, and played over 1.4 billion times a day -- more than one billion alone for Candy Crush.

Profits in the fourth quarter reached $159 million.

However, analysts have cautioned that King's long-term earnings viability remains questionable owing to its business heavily reliant on a single product.

Research firm PrivCo notes that King itself estimates the average lifespan of a paying player on a particular game at two to nine months.

Given that much of the growth in Candy Crush subscribers ended in the first quarter of 2013, "many of the paying players on Candy Crush will soon reach the end of their estimated playing period," PrivCo said.

"As a result, King's other games will need to grow at much faster rates if King is to maintain its current growth rates."

Analysts have noted that Zynga, creator of the once-mighty "FarmVille" game lost 40 percent of its value after entering the market in December 2011 with a valuation of $7 billion.

Zynga pioneered online social gaming at a time when Facebook was center stage and got caught on its heels when players enthralled by free play on smartphones or tablets flitted away from the San Francisco-based company's titles.

Zynga took arrows

"Zynga was a pioneer in its space," said longtime game industry analyst Scott Steinberg, now general manager of Phoenix Online Studios.

"The trouble is, sometimes pioneers catch the arrows."

Zynga was an early innovator, and is not out of the game.

While no one can predict how long a game will be a hit, Candy Crush has shown staying power. And King has the benefit of learning from Zynga's woes.

Candy Crush started life as a Facebook game in 2012 but can also be played online and on smartphones.

In a move that encourages players to spread the game, Candy Crush lets people call on friends or family at Facebook to download the title and help them advance.

In a promising note, Candy Crush has characteristics in common with classic title Tetris, which remains a star at nearly 30 years old.

A constant peril for makers of mobile games, which are often free, is that players can be fickle in their loyalties.

"It is one thing to have a game that is a cultural phenomenon," Steinberg said.

"It is another to have one with a user base that stay loyal year in and year out."

Silicon Valley analyst Rob Enderle is leary of mobile or social game companies overall, reasoning that players are fickle and business models yet to be perfected.

"Zynga showed that you are as good as your last game," Enderle said.

source: www.abs-cbnnews.com