MORNING BID – Crushing It

March 26, 2014

Is King Digital Entertainment the next Zynga or not? The markets may not find out with today’s first day of trading in the London-based company, but it will provide a bit more context for those eager to build some kind of “time wasting” index or something like that. The King IPO has other gamemaker companies waiting in the wings at a time when there’s been a high volume of IPOs this year coming from unprofitable companies – according to Renaissance Capital, the IPO research firm, 66 percent of this year’s 53 IPOs were unprofitable names, though Kathleen Smith, principal at the firm, points out that if you clear out the biotech names, just 37 percent are those that do not yet have earnings. (Whether this is a good argument or not is another matter — witness the trading lately in the biotechnology shares overall, which have been pummeled in the last few weeks.)

The obvious reference point for King is Zynga, which has lost about half of its value since the company’s IPO in 2011 that valued it at about $8.9 billion. And things did well for them as long as people were interested in Farmville, until they weren’t. Right now, Candy Crush is the current darling, drawing in more revenues on Apple’s App store than any other in 2013, and, well, it just happens to garner three-quarters of its revenue from this game (well, 78 percent, actually). These kinds of fads tend to fade, though, putting pressure on the company to keep filling the void with some kind of new version or new product, not an easy task.

The company’s registration statement helpfully points out that this game, plus Pet Rescue Saga and Farm Heroes Saga together account for 95 percent of total gross bookings — but really, that’s not exactly a three-legged stool here, as we can see well enough. And that leaves you a model of finding a way to make the most profitable activity ever that you can use to while away the hours, for infinity forever (or at least 20 years or something like that). Because time-wasting just really isn’t much of a business model. Yes, film and television qualify as leisure, but production companies don’t bank it all on one program, and besides, this ain’t Game of Thrones we’re talking about here. A better comparable would probably be the bowling stock bubble of 1961 when Brunswick and AMF shares went kinda nuts on the idea that Americans would be bowling for two hours a week, every week. Yes, really. BOWLING.

The summary offering puts it well enough by reiterating its biggest problem – lots of competition. “We face significant competition, there are low barriers to entry in the digital gaming industry, and competition is intense,” they wrote in their F-1 registration. (They’re so worried about competition they said it twice in one sentence.) They also point out that people might, well, find something else to do with their time (like go bowling). So investors have a right to be wary – while Renaissance’s US IPO Index has done well for itself over the last three years, gaining 52 percent, it is down 4.7 percent over the last month, trailing the S&P 500 pretty badly.

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