Candy Crush–ed: an odd but encouraging result (except for shareholders)

King Digital Entertainment (KING), maker of the popular mobile game Candy Crush, went public yesterday, It sold 22.2 million shares at an offering price of $22.50 each, a price that was in the middle of the announced $21 – $24 range.  The offering was led by JP Morgan, Credit Suisse and Merrill Lynch–KING wanted no participation by Morgan Stanley or Goldman, powerful underwriters the company apparently felt were tainted by the Facebook IPO fiasco.

the odd part

The stock opened relatively quickly, before 10 am, but at $20.99 on 842,000 shares.  After some initial gyrations, it fell fairly steadily from there, closing the day down by 15% at $19, on volume of 41 million shares.

What’s peculiar is that I can see no effort by the underwriters to stabilize the price at the offering level.

Typically underwriters place about 15% more stock with clients than they purchase from the IPO firm.  This allows them to absorb any potential selling during the initial hours of the stock’s debut.  Yes, this is legal.  The underwriters declare when they are stabilizing the stock and when they have halted this activity.  Normally you don’t need to see an announcement, though.  The stock runs into a brick wall (for a while, anyway) that prevents it from falling below the offering price.

In this case, there was no trading at all at the offering price.  The underwriters trading books must have been hit by a wall of selling (presumably limit orders as well as market) that convinced them that resistance was futile.The odd part is that this all occurred less than a day after the offering price was set and the deal fully subscribed.

the good

It seems to me that KING must be regarded as a speculative stock.  Yes, the company earned $1.75 a share in 2013.  But the vast majority of that comes from a single game that competes in a notoriously fickle casual gaming arena.  One has to ask how long Candy Crush will remain popular and what other hits are in the pipeline.

There may well be good answers.  And the company may prove very successful.  However, predicting earnings for 2014, 2015…requires a substantial leap of faith.  This places it in the same camp as, say, WDAY, TWTR, TSLA and maybe AMZN and NFLX.

Anyway, everyone in the latter group has been selling off pretty heavily recently.  I don’t think the companies have changed much, if at all.  What’s occurring, I think, is that the stock market is taking a more sober attitude toward risk as the Fed lays out more concrete plans to end the emergency monetary stimulus that has characterized the past half-decade for it.

The more self-correction we see in the stock market now, the less likely it becomes that upcoming Fed action will cause the entire market to decline when it happens.





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