Anyone interested in stocking up on King Digital Entertainment shares during the company's IPO should not forget what happened to the last Internet gaming darling, Zynga.
King's IPO is scheduled to take place on March 26, but industry watchers wonder if King will manage to dodge the disaster that befell Zynga after its IPO two years ago.
King, the maker of the insanely popular Candy Crush Saga mobile game expects to sell 22.2 million shares at between $21 and $24 each. King Digital expects proceeds from the sale in the $612 million range, up from the forecast $500 million made when the company filed with the Security and Exchange Commission in February for an IPO. The company will sell 15.5 million shares while the remaining 6.7 million will be handled by other firms.
If it all pans out, the valuation of King would be $7.6 billion.
This is a very similar situation to where Zynga sat in 2011. Prior to its IPO the company was valued at $11.5 billion, but this was all but erased within a year as the company's weaknesses were exposed.
Potential investors cannot say they were not warned. King's prospectus shows the company's good and bad side. King's executives also noted that it relies on a small number of games for the vast majority for its success, which some consider the biggest problem the company faces.
"In the fourth quarter of 2013, our top three games Candy Crush Saga, Pet Rescue Saga and Farm Heroes Saga accounted for 95% of our total gross bookings," it noted.
Breaking that down, Candy Crush Saga accounted for 78 percent of its gross bookings during the last three months of 2013. In February alone Candy Crush had 97 million daily players.
King, which was founded in 2003, claims that in February 144 million active users logged on to play one of its games daily for a total of 1.4 billion game plays per day. This is up from 128 million daily active users playing 1.2 billion games in December.
The number of players is not the only aspect of the company that is growing. King noted in its prospectus that one of the risk factors involved is the explosive growth of the company itself. Since December of 2011, it has added 521 employees and that number is expected to continue climbing.
"We have experienced a period of significant rapid growth and expansion in our operations that has placed, and continues to place, significant strain on our management and resources. In addition, some members of our management do not have significant experience managing a large global business operation, so our management may not be able to manage such growth effectively," the company said.
As would be expected potential investors have to realize that if the gross bookings for its small retinue of games falters or the company cannot expand its game portfolio, then the company will not meet its financial projections.
