Will Candy Crush Get Crushed in its IPO?

King Digital Entertainment PLC, maker of the popular 'Candy Crush Saga', is planning a $500 million IPO, implying a $5.5 billion valuation for the company. This IPO may remind investors of Zynga's offering several years back. While Zynga's share price has recovered as of late, it's still trading at roughly 50% of its IPO price, leaving investors who have held on since the IPO with heavy losses. In the wake of Zynga's IPO, King Digital is attempting to distinguish itself by being very clear about the slowing growth of it's top game 'Candy Crush Saga', while Zynga assured investors that it could repeat the success of its hit game 'Farmville'. King Digital is also distinguishing itself by offering a smaller offering of $500 million as opposed to the $1 billion raised by Zynga's IPO, even though King Digital has almost double Zynga's revenue at the time of its IPO.

The two main issues with King Digital are the nondiversified revenue streams and the low barriers to entry in the business. King Digital three main games (and revenue streams) are: 'Candy Crush Saga', 'Pet Rescue Saga', and 'Heroes Saga'. With only three revenue-producing games, and roughly 80% of revenues coming from 'Candy Crush Saga', King Digital's revenue stream is extremely vulnerable to any trend away from their core game base. The digital gaming industry also has virtually no barriers to entry, as any programmer can easily produce a similar game with minimal effort.

King will be listing its shares under the ticker KING on the New York Stock Exchange, and the lead bankers for the IPO will be JP Morgan Chase, Credit Suisse, and Bank of America Merill Lynch. The main question for King will be whether or not they can repeat the success of their game 'Candy Crush Saga', and if the game can continue to gain traction and momentum in the fickle mobile-gaming industry. For now I would recommend caution as King Digital attempts to prove itself and its staying power.

-Radi -- Radi Sultan