King Digital Entertainment (NYSE:KING), maker of the popular mobile game Candy Crush, didn’t quite hit the ground running when it launched its initial public offering on March 26. Shares opened for trading on the New York Stock exchange at $20.50, down about 8.9 percent from an IPO price of $22.50 per share, and closed the day at $19. In the five trading days since, shares fell as low as $17.62 before recovering to about $19.50 on Tuesday afternoon.
Much of that recovery took place on Tuesday, when Mr. Market apparently decided to buy on the dip. Shares jumped as much as 8.6 percent on the back of no significant news. The mini-rally did, however, stoke concerns that there’s a bubble inflating beneath technology and Internet stocks like King Digital. Although King Digital itself has so far avoided an outsized valuation, the IPO market in general is pretty frenetic as investors stretch their risk tolerance in the search for yield.
Twitter’s (NYSE:TWTR) IPO has pretty much become a symbol for the frothiness in the market. Shares of the social platform hit the market at what many already considered an over-inflated price before skyrocketing even higher. The stock has since cooled down some, but it’s still hot with speculation and hype.
King Digital is no Twitter, but it occupies a similar niche in the spectrum of investments. It is relatively small, new company; it anticipates rapid growth; it threatens to disrupt and lead a market; and it deals with mobile tech and social media, which are like the Wild West right now — basically, it’s a siren. King Digital, like Twitter and any number of tech and Internet IPOs over the past few years, is tempting investors into the rocks with the promise of outsized returns.
However similar they may be, King Digital is working with a different set of tools than Twitter is. For one, King Digital is profitable, earning $153 million at the end of 2013 on revenue of $602 million. For another, it has a business model that is a little more digestible. King Maker is in the business of making games — specifically, mobile games like Candy Crush. In its prospectus, the company spends a long time arguing its competitive advantage in this area, and it makes a pretty compelling case.
The team is relatively small, so overhead is low, the company has production down to a science, and the members have demonstrated that they can distribute their product. Moreover, they already have an enormous player base of 324 million monthly unique users. This is more players than people who use Twitter in any given month.
There are some concerns that King Digital is a one-trick wonder with Candy Crush, and the company tried to address these concerns in its prospectus, writing: “We have put the long-term retention of our players at the heart of our business model. While our players are able to enjoy our games for free, we generate revenue by selling virtual items to a subset of players who wish to enhance their entertainment experience. … Following these principles, we have gathered a wide base of approximately 12 million average monthly unique payers, representing approximately 4% of our monthly unique users as of December 31, 2013.”