King Digital Values Itself at $7.6 billion - Analyst Blog

The first two months of 2014 have been very productive for Initial Public Offerings (IPOs) particularly in the technology sector. Start-ups as well old companies (for e.g. Coupons.com) are rushing in to join the bandwagon and cash in on the IPO frenzy. Although the fundamentals do not always support the lofty valuations, investors are aggressively bidding for them in search of the next Twitter or Facebook.

Candy Crush Saga maker King Digital Entertainment Plc is also hoping to ride on this wave. The popular game maker values the stock at approximately $7.6 billion, which makes it the fifth most valuable gaming company after Nintendo, Activision ATVI, Electronic Arts EA and NetEase.

King Digital's valuation makes it much more valuable than established players such as Take-Two Interactive TTWO and social gaming's popular name Zynga ZNGA. King Digital's overdependence on Candy Crush Saga is a major concern. It reminds us of Zynga's fate, which was significantly dependent on the success of its “ville” series. Zynga debuted at $10.00, but now trades at around $5.89 (52-week high).

The stats are interesting particularly due to the fact that out of King Digital's 180 games portfolio, only Candy Crush Saga is a significant hit and has 90 million daily active users. The game contributed 78.0% of the company's sales in 2013. The next game Farm Heroes Saga has 20 million daily users, a significant gap not to be overlooked from an investor's perspective.

On the other hand, Take-Two's Grand Theft Auto V was the top-selling game in 2013, followed by Activision's Call of Duty: Ghosts and EA's Madden NFL 25. Although King Digital is hoping to benefit from the gaming industry's ongoing shift to mobile platforms, the revival of the packaged video game industry since the launch of the new consoles from Microsoft and Sony is quite a headwind.

Year-to-date, shares of these companies (except Nintendo and NetEase) have shown significant strength. EA's recent release Titanfall and Activision's Hearthstone: Heroes of Warcraft have garnered significant attention for gamers. We believe gamers (particularly hardcore) will be spending much more on games launched on new consoles from EA, Activision and Take-Two in the near term.

This will hurt revenues of social and casual gaming companies. Moreover, the social and casual gaming sector is prone to heightened competition. According to some industry experts Candy Crush Saga is already losing its shine amid competition from Supercell's Clash of Clans.

King Digital will be offering 22.2 million shares for a price band of $21.00 to $24.00 per share. At the top of its price band, King Digital is expected to raise $532.8 million. According to Reuters, the offering is set for Mar 25 and the stock will start trading from Mar 26 on the New York Stock Exchange under the ticker symbol KING.

Currently, both Take-Two and Zynga sport a Zacks Rank #2 (Buy), while EA and Activision carry a Zacks Rank #3 (Hold).