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Candy Crush IPO not so sweet
King Digital entertainment Plc, the London-based developer behind the mobile gaming phenomenon “Candy Crush Saga”, was perhaps left with a bitter taste in the mouth after the underwhelming first day of its highly anticipated IPO. The company, along with private investors, sold 22.2 million shares in the IPO at an initial offering price of $22.50, valuing the company at approximately $7bn.
The IPO was originally priced with a range of $21-24, with the final price perhaps betraying the doubts of some investors over the company’s long term prospects. There have been concerns about whether the company is simply a ‘one trick pony’. King Digital produces close to 180 games but 78% of its revenue in 2013 was generated from Candy Crush alone. The company has moved to quell the negativity, stating in its investor prospectus: “We believe we have a repeatable and scalable game development process that is unparalleled in our industry”.
These statements appeared to do little to allay investors’ doubts and King Digital’s shares fell as much as 16% below their starting price on the first day of the launch. One of the reasons that investors seem to lack the same confidence as King Digital could be a result of the poor performance of Zynga – the creator of Farmville – since its IPO in 2011. Zynga was also valued at $7bn and investors may have drawn parallels between the two companies which could explain their reticence in strongly backing King Digital’s IPO. Zynga has faltered since its IPO and now has a market capitalisation of approximately $4bn, just over half of its valuation when it went public.
Although this may be of concern to investors, there is one significant difference between the two companies. Zynga was extremely reliant on Facebook as an operating platform for its games, with over 94% of its revenue derived from Facebook users. As the proliferation of smartphones increased, users migrated to mobile gaming, leaving Zynga high and dry. King Digital’s games are mobile based, so on this basis the company appears to have a much more sustainable customer base moving forward.
The company also claims to have developed a highly sophisticated marketing model that allows them to target their advertising in a “highly granular and data-driven way”. The company spends vast sums on marketing and could leverage the success of Candy Crush to promote its other titles in an attempt to diversify its revenue streams.
A large part of King Digital’s success will depend on whether investors share the company’s confidence that it can keep existing users engaged and attract new users both to Candy Crush and its other titles. In the current climate of high-priced acquisitions, and with other profitable mobile gaming companies waiting in the wings, the performance of King Digital over the next few months is sure to be heavily scrutinised.