Candy Crush maker prices IPO

King Digital Entertainment sold shares to the public in the middle of its stated price range, indicating that investors willing to invest, just not the soaring amounts that other tech companies have garnered recently.

The New York Times had this story by Michael J. de la Merced and Mark Scott which points out that now King must convince investors it’s more than just a one-game wonder:

Perhaps virtual candy is not as enticing as once thought.

King Digital Entertainment, the maker of the hit puzzle game Candy Crush Saga, priced its offering at $22.50 a share on Tuesday, according to a person briefed on the matter. That was the midpoint of an expected price range. Still, that values the company at just over $7 billion in one of the biggest initial public offerings so far this year.

Now King must convince its new investors that it can come up with new hits to replace its aging cash cow, avoiding the missteps of other game makers that failed to duplicate previous successes.

Its much-anticipated arrival on the public markets signals the continued hot streak of the I.P.O. market, as companies hope to seize on buoyant stock markets and eager stock buyers. Issuers have raised $31.2 billion in proceeds to date, up nearly 70 percent from the same time last year, according to data from Renaissance Capital.

Much of potential buyers’ attention has revolved around fast-growing digital companies like Twitter, whose initial stock sale raised $1.8 billion.

Drawing almost as much scrutiny is King, an 11-year-old multinational company that has posted huge growth thanks to its one monster hit, Candy Crush. A version of a classic “match-three” game in which players line up three or more same-color candies, the title became a global cultural phenomenon.

Nearly 100 million users play Candy Crush every day, drawn, in part, by a seemingly endless supply of new levels and features. Its success has overshadowed King’s other titles, including Farm Heroes Saga and Pet Rescue Saga.

Bloomberg’s Leslie Picker and Cliff Edwards reported that investors may have been scared after other IPOs with similar business models:

King’s discount may reflect lessons investors learned following Zynga’s debut. The maker of “FarmVille” went public in December 2011, dropped 5 percent in its debut and slumped almost 80 percent in the subsequent year. Zynga’s revenue, like King’s, was concentrated in one major source at the time of its IPO: more than 90 percent of its sales came from Facebook Inc. Shares continued to slide as Zynga’s users started defecting to “Candy Crush.”

Unlike Zynga, which hasn’t posted an annual profit since it went public, King’s after-tax profit margins were 30 percent last year, its prospectus shows.

King’s shares will start trading tomorrow, listed on the New York Stock Exchange under the symbol KING. JPMorgan Chase & Co., Credit Suisse Group AG and Bank of America Corp. managed the offering.

But as Matt Jarzemsky points out in his story for the Wall Street Journal, the company’s $7 billion valuation is hardly indicative of a company without prospects:

The standard term that people use to describe this kind of [business] is hit-driven,” said Rett Wallace, chief executive of private-company research and data provider Triton Research LLC.

“For all of the claims that Zynga made—and King makes the claim too—that they have a scalable, repeatable process, it just turns out that the alchemy of figuring out a thing that billions of people are going to use all the time is really hard,” Mr. Wallace said.

However, King is seeking a relatively modest valuation versus some of its peers, some analysts say. Sterne Agee & Leach Inc. analyst Arvind Bhatia estimates the company’s revenue will grow to $2.49 billion this year. At the IPO price, it would be trading at 3 times his sales estimate. Zynga trades at 5.5 times analysts’ average 2014 sales forecast.

On a price-to-earnings basis, King would also be valued at a discount to established videogame companies like Activision Blizzard Inc. ATVI +0.48% and Electronic Arts Inc.,EA +1.00% according to Mr. Bhatia.

“They’re being honest with investors regarding their slowing growth rate, which I think is helpful,” said Rob Romero, portfolio manager at Connective Capital Management LLC, a Palo Alto hedge-fund firm with $120 million under management. He said in an interview before the pricing that he planned to try to buy shares in the deal.

“They need to be able to generate new games and successfully develop and market their new-game pipeline to replace the revenue that will inevitably be lost when Candy Crush begins to decline,” Mr. Romero said. “And they have such a pipeline.”

Matt Krantz of USA Today called the deal “pivotal” since it’s likely to forecast the direction of the IPO market:

It’s a pivotal deal for the IPO market, which is in a boom that is shaping up to be the biggest since the dot-com frenzy. Yet so far, young tech companies haven’t been a big factor in IPOs, but that could quickly change if deals like King work out. “The market is getting hotter for tech,” says Francis Gaskins, director of research for Equities.com.

The King IPO is more than just child’s play for investors. That’s clear in the:

• Resurgence in the role of tech. Young tech companies such as King are traditionally the soul of a robust IPO market. But the number of tech IPOs lagged behind health care, specifically biotech, all year. Just nine of the year’s 53 IPOs so far have been in tech, says Renaissance Capital. A vast majority, 29, have been health care.

• Return of young companies. Thanks to young companies such as King, the average age of companies with IPOs this year is 13 years, Renaissance says. That’s down from 16 in 2013 and 20 in 2012. The return of younger firms to the IPO market underscores the viability of IPOs to executives vs. other ways to cashing out, including selling out to competitors.

While King didn’t max out it’s price initially, it may prove to be a good investment for those buying at the offer. Because demand didn’t push the price too high, it may see a nice pop. Or, obviously, it could fall flat.