King Digital Entertainment Plc, the developer of the “Candy Crush Saga’ game, raised $500 million in its initial public offering last night and opened for trading this morning. Within minutes of the market debut, shares slipped more than $2 from the $22.50 offer price. Despite $568 million in (after-tax!) earnings last year, King is among the most widely scorned offerings in recent memory.
Bloomberg’s Leslie Picker and Cliff Edwards reported that King faces a “one-hit wonder” discount because of fears that it’s unlikely to repeat Candy Crush’s success. The New Yorker’s James Surowiecki makes a similar point, comparing King to Ty Inc., the maker of Beanie Babies. Comparisons to Zynga Inc., the games maker that has stumbled badly since a much-hyped 2012 IPO. Add that King is so profitable that it doesn’t need any more money to develop games, so why should it go public at all — unless its owners think this is the top of the market?
The arguments against the King IPO are cogent. On top of that, The Market Now understands why 10-year-olds would play Candy Crush but is utterly unable to see how it could maintain the interest of the adults playing it on the train.
All that said, the King IPO has one really big thing going for it in the long term: Companies that make a lot of money before their IPO tend to continue doing so after, and their shares do well in the long run.
Data from Jay Ritter of the University of Florida, who has been tracking IPO returns for decades, show that offerings from companies with $50 million or more in revenue do far better three years out than those from early stage companies. Of that group, as the Wall Street Journal’s Telis Demos has shown, those that are already profitable when they go public do best, beating unprofitable companies by 34 percent after three years.
You can also look at this great data visualization from Tableau Software. It shows clearly that while speculative companies without profits often do very well until the magic wears off, companies like King that are profitable before going public do far, far better over the long term. It’s possible that King is indeed a one-hit wonder; unlike most other profitable companies that go public, King doesn’t have a long track record of making money — just one huge success. Still, the numbers here are powerful and TMN — despite not seeing the appeal of Candy Crush — is inclined to let the profits do the talking here.