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.





a short reprise of the Zynga (ZNGA) IPO

King Digital Entertainment, PLC  is the maker of the fabulously successful mobile-centered game Candy Crush Saga.  The firm has filed a form F-1 in preparation for an IPO.  King (proposed ticker: KING) intends to raise around $500 million.

Not surprisingly, the KING offering has reawakened bad memories of the 2011 IPO of ZNGA, which was led by Morgan Stanley and Goldman (no shock, either, that neither of those firms has a role in the KING IPO).

I haven’t yet read the KING offering document.  It’s possible that I won’t.  But I still thought it might be useful to look back at the characteristics of ZNGA that, in my view, made that stock an unattractive investment from the start.

1.  Virtually all the traffic coming to ZGA’s games was generated by Facebook.  This made it difficult to tell whether ZNGA’s games were successful because they were great games, or because they were being featured on FB.  If the latter–which subsequently proved to be the case–FB held the economic power in their partnership.  Any lessening of FB’s marketing efforts would quickly translate into a reduction in ZNGA’s profits.  A big weakness of ZNGA, not a plus.

2.  A reasonable way of assessing social games is to measure:

–the time needed to reach the peak number of players,

–the number of peak users, and

–the rate at which the number of users fades from the peak.

Even prior to the IPO, ZNGA offerings launched after its signature game, Farmville, were peaking faster than Farmville, and at lower numbers of users than Farmville.  In addition, they were as fading from the peak more quickly.  In other words, none of them had anything near the oomph of Farmville. This was all bad news.

3.  The actions of  the lead underwriters, both before and after the ZNGA IPO were quite odd, in my view.

For one thing, according to the New York TimesMorgan Stanley mutual funds bought  $75 million worth of pre-IPO shares of ZNGA in February 2011 at $14 a share.  Some have suggested that this was done to help persuade ZNGA to choose Morgan Stanley as a lead underwriter.

For another, the underwriters released the top management of ZNGA, as well as some venture capital investors, from IPO share “lockup” agreements that prevented their sale of stock prior to May 29, 2012.   Instead, a sale of 49,4 million shares at $12 each raised close to $600 million in early April for these high-profile holders.  By the original lockup expiration, the stock was trading at little more than half that level.

My overall impression is that the underwriters (incorrectly) thought that the heyday of tech investing was over.  This would imply that they and the companies they were moving to initial public offerings had only a short time to cash in before the rest of the world figured this out.  As a corollary, the traditional rules of trust and fair play between underwriter and professional portfolio manager/wealth management client no longer held–because there would be no follow-on business that once-burned clients would shy away from.

relevance for KING?

Again, I should mention that I haven’t yet analyzed KING.  Candy Crush Saga may well prove a fleeting fad and KING a one-trick pony.  On the other hand, the underwriters are different this time.   And I don’t sense the same IPO-before-it’s-too-late urgency that was in the air in 2011.