Shares in King Digital Entertainment fell as much as 16 per cent following its IPO yesterday, underscoring investor concern about the company's reliance on Candy Crush Saga and dampening hopes that its coming-out party could revive investor interest in the mobile gaming industry.
Mobile game industry executives had looked to London-based King's IPO, the largest by a gaming company since Zynga went public in 2011, to help sweep aside skepticism over a notoriously fickle, volatile market.
But King’s shares fell to a low of $18.90 in afternoon trade from their IPO price of $22.50, which valued the company at about $6 billion.
Since Twitter's market debut in November, King's IPO was the largest US tech IPO and the second-worst performing after textbook rental and academic service company Chegg, which plummeted 23 per cent.
The company offers over 180 games but its two-year-old Candy Crush Saga game, in which users move candies to line up at least three of the same color, accounted for over three-quarters of King’s revenue for the last three months of 2013.
"Once you have a hit, it's hard to make a string of hits. How many bands were the Beatles?" Roger Kay, analyst at research firm Endpoint Technologies Associates said.
“Also, there’ve been a lot of high priced IPOs and mergers and acquisitions (of late) and when valuations get frothy, investors get disappointed when returns don’t measure up to expectations.”
Candy Crush, a free game, is now a household name and has been downloaded more than 500 million times since its launch on mobile devices.
Using the "freemium" model, King makes money by selling players extra lives and other add-ons. King's dismal debut dragged down other gaming stocks yesterday. Zynga shares fell over 4 per cent, while smaller player Glu Mobile slipped 4.5 per cent. When Zynga debuted in 2011 with about the same valuation as King, its stock ended down 5 per cent on opening day.
FarmVille maker Zynga’s market value has since shrunk to just over $4 billion, falling victim to concerns about the danger of investing in companies that rely heavily on a hit game.
"This was mispriced," Sterne Agee analyst Arvind Bhatia said of the King debut. "There are a lot of IPOs in the pipeline so investors are not starving ... and are being picky. Today's action also says investors are not going to ignore fundamentals."
King's shares closed down about 16 per cent at $19.00 yesterday. JP Morgan, Credit Suisse and BofA Merrill Lynch were the lead underwriters for the offering.
There are some signs new titles from King’s portfolio may be gaining traction. Analysts have pointed out that Farm Heroes Saga has seen momentum since its January mobile launch. The title has since landed on the list of top 10 highest-grossing apps on Apple’s iOS platform, but whether the game will prove to be a money-making title in coming months remains to be seen.