King Digital Entertainment priced its IPO and is preparing to list on the New York Stock Exchange tomorrow, under the ticker “KING.” The digital gaming company priced at $21.50 per share and is set to raise $500 million in the offering, valuing the company above $7 billion.
The investor outlook for the gamemaker is mixed. Those in favor of King, point out that the company has built up a digital empire with 180 games played 1.2 billion times per day. King boasts 128 million daily active users.
King is also profitable, with $568 million in net income in 2013, on $1.8 billion in revenue. This is a sharp increase from $8 million in profit on $164 million in revenue the year before.
Yet 78% of King’s gross bookings are all tied to one hit game; Candy Crush. And 95% of its revenue is tied to three games; Candy Crush Saga, Pet Rescue Saga and Farm Heroes Saga. If these games lose popularity, it could pose a significant threat to King’s earnings.
King acknowledges this risk in its IPO filing. “If the gross bookings of our top games, including Candy Crush Saga are lower than anticipated and we are unable to broaden our portfolio of games or increase gross bookings from those games, we will not be able to maintain or grow our revenue and our financial results could be adversely affected.” Gaming companies must continuously reinvent the wheel to remain competitive.
“Investors will be concerned about the hit driven nature of casual games and the fact that over three-quarters of the company’s Q4 ’13 bookings were derived from a single game,” warns Tim Keating, President at Keating Investments.
King has drawn comparisons to Zynga, the maker of Farmville and Words with Friends. Although its stock has risen substantially over the past year, Zynga is still trading at less than half of its original offering price from 2011.
“We find little to like in this IPO. It’s very reminiscent of the Zynga IPO on multiple levels, including its high product concentration risk in just one game,” says Sam Hamdeh, CEO of Privco.
Founded in Sweden in 2003, King struggled before it released Candy Crush. Some early employees were less optimistic about the direction of the company. Co-Founder Toby Rowland left King in 2011, selling his shares for $3.1 million. Today, his stake would have been worth nearly a billion.
King’s largest shareholder is private equity firm, Apax, with a 48% stake. Chairman Melvyn Morris has a 12% stake and CEO Riccardo Zacconi has a 10% stake.
There have been 60 U.S. IPOs this year, according to Dealogic. This is the fastest pace since 2000, when there were 125 in the same period.