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King of PU

12 March 2014 By Robert Cyran

The maker of the popular game “Candy Crush Saga” has picked $7.6 billion out of the thin air for its initial public offering. King Digital Entertainment uses creative metrics to justify its whopping valuation. But there’s no way to calculate what an enterprise is worth when its profit can skyrocket 70-fold one year and could collapse the next. Rival Zynga’s IPO flub serves as an apposite warning.

King’s performance in 2013 was certainly impressive. Revenue climbed more than 11-fold, which means the company enjoyed astounding operating leverage. Moreover, the firm throws off boatloads of cash – $580 million from operations last year. Its backers have only had to put in $9 million of capital to date. No wonder they now fancy taking the company public.

The trouble is, the methods they’re using to value the company aren’t particularly helpful. Metrics like monthly gross average bookings per paying user (MGABPPU) and gross average booking per user (GABPU) shed little if any light for prospective investors.

Social gaming as a business is driven by hit products. Zynga’s travails show how hard it is to stay on top. Its shares have lost about half their value since their opening-day high in 2011 as the popularity of games like “FarmVille” faded. Heavy spending to buy rivals hasn’t worked either. Zynga spent $200 million on OMGPop and closed the business about a year later.

Sure, King looks cheaper – at the top of the range it would be worth about four times last year’s revenue, compared with five times for Zynga. But such comparisons may not be solid. “Candy Crush Saga” generated close to 80 percent of King’s bookings in the fourth quarter. There are already signs its peak may have passed. Instead of its customary explosive growth, fourth-quarter revenue was 3 percent lower than the third quarter. King needs a new hit, if not several, soon.

The company makes much of its “unique, repeatable, scalable” system of developing and distributing new games. There’s some truth to that – the company has been cash flow positive for nine years. So it can probably trundle along for a while even if it can’t develop a new hit when its current one fades. That’s hardly a basis for such a lofty IPO valuation.


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