Is This Company The Next Big Tech IPO?

| March 19, 2014 | 0 Comments

Over the last year or so, tech IPOs appear to have regained their allure.  Investors are once again lining up to buy shares in the latest hot tech companies as they go public. 

However, there does seem to be a more conservative level of IPO pricing this time around.  After the initial failures of companies like Zynga (ZNGA) and Groupon (GRPN) and even Facebook (FB), companies are having their shares priced at more reasonable levels at launch. 

(As a side note – ZNGA and GRPN are still struggling, but FB has obviously turned things around.)

So how about the next hot IPO, King Digital Entertainment?  Is it the next ZNGA or will it take off out of the gate, more like Twitter (TWTR) did?

If you’re not familiar with King, it’s the maker of the massively popular mobile game called “Candy Crush Saga”.  The game is all about matching up groups of three multi-colored candies.  The initial download is free and players pay for extra features.

King’s hit game has been wildly successful.  Between Candy Crush (about 75% of the company’s revenues) and other games, King had a whopping 144 million daily active users in February.

2013 revenues climbed to $1.9 billion, or 11 times what they were in 2012.  Meanwhile, profits jumped to $568 million compared to just $8 million in the year prior.  Clearly, the company’s growth has been impressive.

However, the company is already seeing a slowdown in Candy Crush quarterly revenues (down 3% from the previous quarter) and players (12.2 million average monthly unique players last quarter down from 13 million). 

If King remains reliant on just one game, will investors be willing to take a risk on the IPO?

That’s where the IPO pricing comes in.

The company expects to price shares between $21 and $24, raising roughly $500 million.  The funds will be used for working capital and acquisitions.  At the high end of the range, King would be valued at $7.6 billion.

Here’s the thing…

Even at $24 per share, King would only be trading at 13x earnings.  That’s a very conservative price for a high-growth tech company.  Moreover, the valuation would be 4x last year’s sales.  Even after ZNGA’s substantial loss in valuation, it still trades at 6x sales.

In other words, the banks behind King’s IPO are taking a cautious approach.  They want to make sure investors get involved. 

Of course, options won’t be listed on King until a few weeks after the IPO (most likely), which is scheduled for late March. In the meantime, if you think King is going to have a successful launch, buying calls on ZNGA may not be a bad idea.  Similar companies tend to move in unison over the short-term.

Yours in Profit,

Gordon Lewis

Tags: , , , ,

Category: Options Trading, Stocks

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

Leave a Reply

Your email address will not be published. Required fields are marked *