King Digital Entertainment plc. Market Cap (as of 28/03/14): $5.82bn
On March 26th, 2014 the London-based King Digital Entertainment, a leading interactive entertainment company for the mobile world known mostly for its popular smart-phone game Candy Crush Saga, listed 22.2 million of ordinary shares on NYSE under the symbol “KING”. The stock commenced trading at $20.5 per share, down nearly 9% from the $22.5 per share it announced the previous day. The $22.5 price target was at the mid end of the $21.0 – $24.0 range it initially set out when it first filed for the IPO on the 12th of March 2014. The $22.5 price valued the company at around $7bn (nearly four times its trailing annual revenue of ca. $1.9bn), but the immediate price drop to $20.5 reduced the company’s valuation to roughly $6.5bn.
In December 2013, the company recorded an average of 128 million daily active users (“DAUs”) while in February 2014 alone this number had climbed to an average of 144 million. A vast majority of these users originated from the company’s mobile games portfolio, consisting of Candy Crush Saga, Pet Rescue Saga, Farm Heroes Saga, Papa Pear Saga and Bubble Witch Saga. From 2011 to 2012, King’s revenue increased 156% from $64mm to $164mm, its adjusted EBITDA increased from $4mm to $28mm, and its profit before tax increased from a $0.7mm loss to $11mm. From 2012 to 2013, the revenue further increased from $164m to $1,884m, an increase of 1,049%, while adjusted EBITDA soared from $28m to $825m, amounting to a before-tax profit of $714m. This continued growth was driven by significant increases in average DAUs and gross average bookings per user that were up 659% and 49%, respectively, in 2103 compared to 2012.
Although King offers more than 180 games on various platforms, the two-year-old Candy Crush Saga alone attracted 97 million of the total 144 million DAUs in February 2014 and lured in 1,065 million daily games played in the same month. The game accounted for as much as 73% of the company’s revenue in the last quarter of 2013. Clearly, such strong dependence on the stream of revenues arising from a single product is probably the reason why the company faced a rather sharp decline in its stock price on the very first day of trading. In fact, if the gross bookings of the company’s top games are lower than anticipated and the firm is unable to broaden its portfolio or increase gross bookings from those games, King will not be able to maintain or grow its revenue and its financial results could be adversely affected.
The mentioned risks were well noted by the public and by the close of trading on Wednesday, King’s stock was at $19.0 per share, down ca. 15% from the anticipated price, giving the company a market cap of ca. $2.3 billion. From the first opening hour of trading, King’s stock has been in a volatile state, dropping as low as $19.1 per share before climbing back up and then down again, as shown in the picture below provided by TechCrunch.
On the same day, King’s weak offering performance also negatively impacted other public technology companies. Both Facebook and Twitter were down by nearly 7%. Even if this could be considered just a momentum shift following a sector IPO stumble, it could be inferred that if investors lose faith in King’s growth potential, which arises mostly from its mobile applications, other companies that share similar monetization plans could face future impairment in their own growth rates, thus adversely affecting their stock prices.
King Digital Entertainment was advised by Fenwick & West, while J.P. Morgan, Credit Suisse and Bank of America Merrill Lynch were the lead underwriters for the offering.
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