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King IPO Price Sends Another Bad Signal to Investors

The King IPO price will be released sometime today (Tuesday), and will likely be at the top of the price range. That means the Candy Crush-maker's IPO could be valued as high as $7.6 billion - about 2.9 times more than King's projected sales this year, according to a revenue estimate by Sterne Agee & Leach Inc . The post King IPO Price Sends Another Bad Signal to Investors appeared first on Money Morning - Only the News You Can Profit From .

The King IPO price will be released sometime today (Tuesday), and will likely be at the top of the price range. That means the Candy Crush-maker's IPO could be valued as high as $7.6 billion - about 2.9 times more than King's projected sales this year, according to a revenue estimate by Sterne Agee & Leach Inc.

If that statistic alone isn't enough to scare off investors, we've got three more...

First, King's similarity to IPO disaster Zynga Inc. (Nasdaq: ZNGA) should serve as a dire warning.

King IPO Price

Zynga priced its 2011 IPO at $10 a share, making it the biggest Internet IPO since Google's (Nasdaq: GOOG) in 2004. Its hit game "Farmville" led the hype, and by early 2012, Zynga was worth $11.5 billion. But soon after the IPO, Farmville's viral popularity began to wane.

The result was dramatic. From March to November 2012, the Zynga stock price fell more than 80%, and the company was forced to drastically downsize. Now Zynga is worth half of its 2011 IPO value, with Zynga stock presently sitting at $4.84 per share. It hit a 52-week low of $2.50 per share and a high of $5.89 per share earlier this month.

Just like Zynga, King's game downloads are free. The two companies glean profits solely from users who buy items to help them advance in-game. Only about 4% of King's daily user population buys such "power ups," wholly accounting for the company's massive revenue.

That means King's success is entirely dependent on its games' viral popularity and growing its user base. As you'll see below, both of those numbers look precarious at best.

King's games' popularity is our second reason King stock will be a bad bet for investors.

The company's most popular game, "Candy Crush Saga," currently accounts for three-quarters of King's total revenue. It's played by 93 million people daily, with more than 1 billion plays every day, and it's been downloaded over 500 million times on mobile devices since its launch in 2012. It's the top game on Facebook (Nasdaq: FB).

Candy Crush Saga is likely to suffer the same fate as Farmville - a viral burst and decline (much like countless other Internet game hits such as OMGPop studio's "Draw Something," which is now defunct). And then all those monthly "power up" buyers that account for King's billion-dollar-plus revenue will start to dry up.

"The red flag for this IPO is that King's revenues and fortunes are built on one game," Destination Wealth Management chief executive Michael Yoshikami said to Reuters. "I would be inclined not to invest in stock like this."

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This next reason the King IPO is a bad bet is perhaps the most striking, and has to do with the company's user base.

Take a look inside King's initial public offering (IPO) filing from Feb. 18. Therein, the online gaming company revealed that its average monthly payers have already declined by 1 million since the third quarter of 2013. Its Q4 numbers for revenue, profit, and adjusted earnings are also falling.

"The first law of capitalism is to make money while the sun shines," Money Morning Chief Investment Strategist Keith Fitz-Gerald said earlier this year. "For investors, this is probably nothing more than a fad."

Projections for the King IPO price today are just adding to the mounting doubts that investors have any chance of netting gains from this play.

"I think the valuation of a P/E ratio of 13 for a high-growth company is indeed reflecting a skepticism about the ability to continue growing at such a rapid pace," University of Florida professor and IPO expert Jay Ritter told Reuters. "The ability to come up with future games and get people to pay for the game is a big question mark."

King Digital Entertainment PLC (KING) will debut on the New York Stock Exchange tomorrow. J.P. Morgan Chase & Co. (NYSE: JPM), Credit Suisse Group AG (NYSE: CS), and Bank of America Merrill Lynch (NYSE: BAC) served as lead underwriters.

The King IPO price for its 22.2 million shares will likely be between $21 and $24 per share.

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The post King IPO Price Sends Another Bad Signal to Investors appeared first on Money Morning - Only the News You Can Profit From.

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