Candy Crush Maker's IPO: Do Mobile Games Have Legs?

Dublin, Ireland-based King Digital Entertainment, makers of the wildly popular mobile game Candy Crush Saga, has filed a Form F-1 with the U.S. Securities and Exchange Commission for an initial public offering (IPO) to raise $500 million. The initial filing lacks details on the number of shares to offered, but the company plans to trade on the NYSE under the ticker symbol KING.

That Candy Crush Saga is a monster hit is inarguable. More than 128 million daily active users play the game more than 1.2 billion times a day. Like the movie and music industries, mobile gaming is a hit-driven business. The problem for the game makers is how to follow up on the hit.

Zynga Inc. (NASDAQ: ZNGA) rode its Farmville franchise to an IPO in December 2011 at a starting price of $11 a share. The stock rose to an all-time high of more than $14.50 a share the following February, before falling to an all-time low of around $2 a share in October of 2012. The stock now trades near $5 a share. And the company has yet to duplicate the success of the Farmville franchise.

Glu Mobile Inc. (NASDAQ: GLUU) held its IPO in May of 2007 and raised $84 million on the sale of 7.3 million shares at a price of $11.50. Like Zynga, shares peaked around $14 within a few months, and the stock trades today at around $5 a share, up from near $2 a share last September. The shares have gained about 33% in the past three weeks, mostly due to the company’s freemium business model, where the games are free to play and in-app transactions of $1.99 or less keep players opening their wallets.

It is this environment that King is looking to enter. From the first quarter of 2012 to the fourth quarter of 2013, gross bookings by quarter grew from $29 million to $632 million. Revenue, the most directly comparable IFRS measure, grew from $22 million in the first quarter of 2012 to $602 million in the fourth quarter of 2013.

King notes in its filing that a small number of games currently generate a “substantial majority” of its revenues. The company also notes “significant competition” and dependence on third-party platforms from Apple Inc. (NASDAQ: AAPL), Google Inc. (NASDAQ: GOOG) and Amazon.com Inc. (NASDAQ: AMZN) for distribution of its games as other risk factors.

The company says that the principal purposes for the IPO are to create a public market for the firm’s stock, to increase King’s visibility in the market and to obtain capital that it plans to use for general corporate purposes, including possible acquisitions.

Following the IPO, the company expects to have about 120 million shares outstanding. Existing shareholders currently hold 37.63 million shares, and an unspecified number of those shares will be including in the offering.

An IPO price of $6 a share would value the company at $720 million, about double the market cap of Glu Mobile and be about 18% of Znyga’s $4.05 billion cap. But the company is probably looking for more than that. At $11 a share, the valuation would be around $1.3 billion. Whether investors believe the company’s model will support that is the big question.