candy-crush

The initial public offering for King, the video game company behind the uber-popular “Candy Crush Saga,” opened trading 10 percent lower ($20.50) than the company’s offering price of $22.50. That’s hardly a good sign. While the stock price could rise before the market closes today, the instant drop suggests that Wall Street still hasn’t gotten over the flash-in-the-pan prospects of hit-driven wonders like King.

That has been industry observers’ fear for the King IPO from the beginning. Even though “Candy Crush Saga” is immensely popular now, it’s easy for games to sputter out after a few months at the top of the hype cycle — just look at Zynga’s “FarmVille,” “Draw Something,” and other mobile games that have fallen out of favor just as quickly as they rose into it. King itself might have been worried about its status as a one-hit wonder, which would explain why it priced the initial offering at $22.50 instead of seeking a higher opening price, according to the Economist:

Believe it or not, King’s pricing betrays a certain modesty. It is plumb in the middle of the range previously announced, of $21-24. That King did not push for more may be surprising. It is not merely profitable, but handsomely so: last year it made $568m on revenue of $1.9 billion. It has grown at a jaw-dropping rate. In 2012 its profits were less than $8m and its revenue $164m. And euphoria seems to surround all things tech: witness Facebook’s splashing of $2 billion to buy Oculus, a maker of virtual-reality goggles, on March 25th, and of $19 billion to acquire WhatsApp, a messaging service, last month.

The case for caution is worry that King turns out to be a one-trick pony. In the fourth quarter of 2013, “Candy Crush Saga” brought in 78% of its gross bookings, a measure roughly equivalent to revenue. Worse, bookings from of “Candy Crush Saga” have started to fall, pulling down total revenue.

Pando’s Cale Weissman wrote about the possibility of King “rotting its teeth out” with an IPO when it first filed to go public in February:

Those who claim that games are nothing but mind candy are right in this case. If so, people really crave sweets. King generated $1.88 billion of revenue last year, most of it from a single game. As Re/code’s Peter Kafka explained, that was after a loss of $1.3 million the previous year.

A revenue jump like that would normally be celebrated. But in this case it’s also a problem. The insane boost is undoubtedly due to Candy Crush. Yes, it’s addictive. Yes, half a billion people have downloaded it on both Facebook and mobile. But games aren’t sticky, and people lose interest. We are even starting to see evidence of this, with King’s declining fourth quarter revenue, which went from $621 million to $602 million.

But Fortune’s Dan Primack made the bull case for King in his “Term Sheet” email newsletter earlier this week:

This is certainly one of the year’s trickiest offerings for investors, given that King is a hits-driven business going public while its top game may be at the height of its power. Not too dissimilar to Zynga going public in the midst of FarmVille-mania. I was curious as to how the two companies currently matched up, so I ran a few numbers. For context, Zynga opened trading today with a $4.3 billion market cap, while King is looking for an initial market cap of between $6.6 billion and $7.5 billion (based on a $21-$24 per share IPO offering range). In the below stats, the first figure is fo King Digital while the second figure is for Zynga:

2013 Revenue: $1.88 billion vs. $873 million
2013 profit (loss): $568m vs. ($37m)
2013 Adjusted EBITDA: $825m vs. $46.5m
Avg monthly active users (Q4 13): 408m vs. 112m
Avg daily active users (Q4 13): 124m vs. 27m
Monthly unique payers (Q4 13): 12.16m vs. 1.3m
Employees: 665 vs. 2,034

This morning’s opening suggests that even though there’s some substance behind King’s saccharine game, Wall Street might still have the bitter taste in its mouth from a history hits-based gaming companies that can’t sustain their success.

[Illustration by Brad Jonas for Pando]