King Digital Entertainment's announcement that it filed for a $500 million IPO on Feb. 18 met with even more negative tweets than the merger of Comcast and Time Warner Cable. After the disastrous Zynga (ZNGA) IPO and declines at Electronic Arts and Activision Blizzard as gaming went mobile, any sane investor would approach this deal with skepticism. A closer look at King, however, indicates that its business is much stronger than Zynga's, and shares may be worth purchasing after some difficult questions are answered. 

Zynga's IPO disaster
In December 2011, Zynga priced shares at $10, the first trade was at $11, and the price dropped in the first 10 minutes of trading. The company sold about 14% of its shares in the offering, but the CEO sold 10% of his own shares even before the IPO. CEO Mark Pincus cashed in more than $109 million as his company bought back stock at $14 per share, 40% higher than the IPO price. 

Investors had another opportunity to get out, but it was small. In the first quarter of 2012, the stock peaked at $15.91, but by the middle of April, it was again below its IPO and has remained there ever since.

In July 2011, Zynga was attracting 232 million active users per month and 60 million active users per day. These are very healthy metrics, but as its popular games Farmville, Mafia Wars, and Words with Friends lost their luster, growth dried up completely.

King might make it because of mobile
Both companies allow players to access games for free, but also charge for virtual goods. The main difference could be King's success in mobile. In Zynga's fourth quarter, mobile bookings were 35% of total bookings, where King's mobile bookings were 73% of total. It's possible that part of the popularity of Candy Crush is the experience when you are away from the computer. The mobile version of Candy Crush was introduced at the end of 2012, and bookings began to skyrocket afterward. Both companies initially developed their games for Facebook, which represents a good launching point thanks to its instant audience, but King has been able to capitalize on the success by bringing its games to mobile devices.

Beware of the numbers
King's estimated valuation at $5 billion is lower than Zynga's $8.9 billion at the time of the IPO, but there is something strange in the F1. King has paid out $500 million in dividends to private shareholders in the last six months. In October 2013, $287 million was paid out, and this month, $213 million was paid. Why are current shareholders selling now? A look at the shift in monthly unique paying subscribers may be the answer.






Mobile Bookings





Web Bookings





Monthly Unique Payers





Source: King Digital Entertainment F1 (in millions)

In the fourth quarter, the number of people making payments to the company decreased for the first time ever. This could be a shallow dip due to seasonality, but if this is the beginning of a trend the ride up could be longer than the ride down.

Don't buy the IPO, yet
Lastly and most importantly, the Candy Crush franchise represents 78% of bookings, so any meaningful sustained dip will dramatically reduce the valuation. For this reason, King should only be purchased by the most risk-tolerant investors. Metrics need to improve either through a confirmation that seasonality was behind the decline in the fourth quarter, or more secondary titles with increased bookings. In short, this company seems to have great potential, but more information is needed for a proper valuation.