Candy Crush maker’s IPO: The case against the tech bubble

King Digital, the maker of the popular smartphone game Candy Crush Saga, got off to a slow start Wednesday in its debut on the New York Stock Exchange. 

It was trading at about $20 a share, down from its  initial offering price of $22.50.

The firm expects to raise about $500 million from the IPO, which values the firm at about $7 billion.

King's initial public offering has raised quite a few eyebrows, particularly given that the company reported that its core title -- which is already losing some steam -- accounted for a stunning 78 percent of all of its revenue in the final quarter of 2013. And 95 percent of its revenue comes from just three titles: Candy Crush Saga, Pet Rescue and Farm Heroes Saga.

Looking at the number like that, it's easy to see King as a harbinger of another tech bubble -- or at least as a possible repeat Zynga's dud performance when it went public in 2012.

But while King's heavy reliance on just a few of its products is cause for concern, it's not exactly fair to make a comparison to the dot-coms of the bubble or even to Zynga, said James Gellert, chairman and chief executive of the financial services firm Rapid Ratings.

"These are very different companies," Gellert said of King and Zynga. "King is a more mature company, it's a profitable company and it's a larger company."

The key word there is profits, something that Zynga never showed before its public debut. Even Twitter and Box -- the coming IPO that has the tech world abuzz this week -- haven't managed to do that.

The big question that everyone is going to ask, he said,  is whether 11-year-old King is a one-hit wonder or not. After all, while the firm boasts 140 million active players for its sticky sweet puzzle matching game, some doubt it can ride that wave of success forever.

"Whether they can immediately replicate it or not, the question really is can they be a viable, long-term business that generates positive returns for their shareholders," he said. "And even if they do dip from a maturing 'Candy Crush,' it still has the profile of a healthy company and an efficient company that will be successful."

But that's not really at the heart of what analysts should look at when assessing a stock, Gellert said. When his firm measures King's IPO against company profiles of bubble-era companies, he said, King actually stacks up well, since it actually has positive operating margins, returns on sales, equity and assets, and a proven record for being able to manage cash effectively.

Is King's valuation too high? Maybe, Gellert says -- that's for the market to decide. But if you're simply looking at whether this is a company with a long-term plan, he said,  if you look at King's past actions, the answer appears to be yes.

Sorry to burst your bubble.

Hayley Tsukayama covers consumer technology for The Washington Post.



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Hayley Tsukayama · March 26, 2014

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