Candy Crush Maker King's IPO Flops - Analyst Blog

The Initial Public Offering (IPO) of Candy Crush Saga maker King Digital Entertainment Plc (KING) failed to gain any favor from investors as share price crumbled 15.6% ($3.50) to end the first day of trading at $19.00.

King Digital's dismal performance — worst among the IPOs to date in 2014 — dampened hopes for a revival in the mobile gaming industry. King Digital's overdependence on Candy Crush Saga can be primarily blamed for the debacle.

King Digital's revenues surged to approximately $1.8 billion in 2013 from a mere $164.0 million in 2012. This was driven by Candy Crush Saga, which was the most downloaded free app on Apple's AAPL iPhone and iPad in 2013. The game contributed 78.0% of the company's sales in 2013.

Candy Crush Saga had 97 million in average daily users as of February. However, according to some industry experts Candy Crush Saga is already losing its shine amid competition from Supercell's Clash of Clans.

King Digital's next game — Farm Heroes Saga — has 20 million daily users, a significant gap from Candy Crush Saga, which investors did not overlook in our view. It reminds us of Zynga's ZNGA fate, which was significantly dependent on the success of its “ville” series. Zynga debuted at $10.00, but now trades at around $4.64.

Moreover, the gaming industry remains highly fragmented and overcrowded. Competition from more established players with a better visible business model like Electronic Arts EA, Activision Blizzard ATVI, Take-Two TTWO and Ubisoft is hardly ignorable. We believe intensifying competition in the gaming industry also alienated some investors.

Nonetheless, the remainder of 2014 will see a number of IPOs particularly in the technology sector that includes the likes of Box and Alibaba. However, we believe King Digital's dismal debut can put a brake on the rate of IPOs, as many of these companies will be forced to reconsider their lofty valuations before appearing in the market.

Currently, Zynga sports a Zacks Rank #1 (Strong Buy). Both EA and Activision carry a Zacks Rank #3 (Hold).