Will Wall Street find Candy Crush parent's IPO sweet?

Until today, few people probably heard of King Digital Entertainment, the corporate parent of the hugely popular Candy Crush game. That is about to change. 

Earlier today, the company unveiled plans for a $500 million U.S. initial public offering. Unlike 68 percent of other IPOs that are unprofitable, King Digital makes money -- lots of it -- earning $567.6 million in profit last year, an increase of more than 7,000 percent from $7.8 million in 2012. Revenue surged more than tenfold to $1.3 billion. As of Dec. 31, King Digital had 408 million average monthly users, compared with 67 million in the quarter ended Dec. 31, 2012. That's an increase of more than 508 percent.

Not surprisingly, King Digital warned in its filing with the U.S. Securities & Exchange Commission that the growth may not be sustainable.

"Although we were profitable in the past, we expect to make significant investments in growing our business and significantly increase our employee headcount, which could reduce our profitability compared to past periods," the company says.

Interestingly, King Digital makes most of its money from the 12 million monthly unique users that purchase virtual goods from the company, which accounts for about 4 percent of all players.  Look for the company to try to expand that potentially lucrative business. About 93 million people play Candy Crush every day even though social gaming growth has slowed.

"People are on the move; they multi-task and live their lives across multiple devices," writes CEO and co-founder Ricardo Zacconi, in a note to potential shareholders in the SEC filing. "Consumption habits have changed -- mobile has meant that people consume more digital content than they ever have before, and they want to be entertained over short periods of time whenever and wherever they are."

Of course, that's easier said than done.

Candy Crush Saga, Pet Rescue and Farm Heroes Saga accounted for about 95 percent of total gross bookings, which is a red flag for investors worried that King Digital might become too dependent on its "hit games" -- like rival Zynga (ZNGA), which rose to fame thanks to the popularity of Words With Friends.

Zynga recently reported a better-than-expected quarterly loss and announced plans to slash 15 percent of its workforce. It also reported a 12 percent decline in daily active users and the 16 percent drop in monthly active users. Zynga's stock, which has fallen 50 percent since its December 2011 IPO, rose today on the King Digital news.

"It's obviously an amazing company but still a one-hit wonder," said Lou Kerner, manager of the Social Internet Fund, which invests in social-media companies, in an interview with Bloomberg News.

King Digital is planning to trade its shares over the New York Stock Exchange under the ticker symbol KING. 

  • Jonathan Berr

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