Is $7.6 billion a bargain for 'Candy Crush' maker?
Game developer King Digital is seeking a steep valuation in its upcoming IPO. It's aggressive for a company with just one hit product, but still a discount to some peers.
By Renée Schultes, The Wall Street Journal
King Digital Entertainment is a casual gamer with a serious valuation.
The "Candy Crush Saga" maker set an indicative price range for its New York initial public offering Wednesday, valuing the casual-games developer at up to $7.6 billion.
King still needs to prove its business is sustainable. But its proposed valuation at least seems to offer investors some buffer against the risk of a one-hit wonder.
The success of Candy Crush has left King with big shoes to fill. Although Candy Crush is still the second-highest grossing game in the U.S. app charts a year after launch, bookings fell in the fourth quarter. And the game generates 78 percent of King's sales before app stores take their cut. Sure, rapid growth of new titles such as "Farm Heroes Saga" is promising. But with 20 million daily users, it has a long way to go to reach Candy Crush's 97 million.
Still, at between nine and 10.5 times 2014 earnings, according to bankers' consensus forecasts, King is being pitched at a discount to peers. That assumes 30 percent earnings growth this year.
Tokyo-listed GungHo Online Entertainment trades at 11.9 times this year's earnings, according to FactSet. GungHo also relies on one title, Japan's top grossing game "Puzzle & Dragons." But its games haven't traveled as well as King's, potentially limiting growth outside Asia. While Candy Crush is a top 20 grossing game in Japan, Puzzle & Dragons ranks much lower in the U.S., according to AppAnnie.
At 2.8 times 2014 sales at the midpoint of the price range, King also comes in well below Zynga (ZNGA), a company that is still making the awkward transition from games played on desktop computers to smartphones and tablets. King makes 73 percent of its bookings from mobile, compared with Zynga's 34 percent.
If King's goal is to create major gaming franchises, a better comparison might be to traditional games publishers, such as Activision Blizzard (ATVI) and Electronic Arts (EA). They trade at 16 and 20 times forecast earnings, respectively. A decent discount seems fair. While traditional publishers face much higher development costs than King, hard-core gaming fanatics can mean their franchises last for years; Activision's "World of Warcraft" took six years for subscriber numbers to peak.
King believes that it has plenty of growth to come. But investors should rightly want protection against earnings volatility in a market where barriers to entry are low, technology is always evolving and casual gamers' tastes are fickle. Game on.
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With the whole Candy Swipe - Candy Crush mess, I can't believe anyone would want to throw their support behind Candy Crush.
As for me, I don't have time for these types of games anyway. Don't get me wrong, I work from home so I have plenty of downtime; I just use it far more constructively. No video game or computer game can beat a good book.
Having said that I would value this company at around 250 million unless they can come up with further original games not based around the first success.
It's easy to be a "One hit wonder" but for a valuation like this you need a proven pedigree.
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