King vs. Zynga

 | Mar 27, 2014 | 10:30 AM EDT  | Comments
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On Wednesday, King Digital Entertainment (KING) went public and it was an unmitigated disaster. Pundits were quick to jump on the bandwagon and spent the afternoon comparing King to Zynga (ZNGA), the online gaming company that hit the wall in 2012.

They called King a "one-hit wonder" and pointed to the failed initial public offering (IPO) as evidence of a tech bubble. But are King and Zynga really comparable? After all the jokes and told-you-sos, is there a price level where you can buy the stock and make money? I decided to take a look.

Oh, boy did the bears have a field day yesterday. By the close of trading, King Digital was down 15.56% to $19. Not a great opening day. But, once the stock settles down (probably much lower), I think there is money to be made, since King is crazy profitable.

Originally founded as Midasplayer.com in 2002, King underwent a restructuring and reincorporated as King Digital just a few days ago in preparation for the IPO. The company operates under the laws of Ireland and has a bizarrely complex corporate structure.

King has developed a total of 180 games, but just a few including Candy Crush Saga, Farm Heroes Saga, Pet Rescue Saga and Papa Pear Saga bring in the majority of the company's revenue. King hit it big just three years ago when revenue went from $63.9 million to $1.88 billion by the end of last year. For 2013, King earned $567 million.

In contrast, when Zynga went public, the company had revenue of $1.1 billion and lost $400 million. Shares of Zynga soared on its IPO. On its first day of trading, Dec. 16, 2011, the stock opened at $8.75 and closed at $9.50. Two months later, the stock was up 54.6% to $14.69. On the IPO, Zynga raised almost $700 million. When Zynga went public, it had $1.1 billion in cash. King planned to raise a maximum of $326 million with this offering. Before the offering, King reported $408 million in cash.

The King offering opened lower because it was not too long ago that Zynga's revenue fell off a cliff. In 2012, ZNGA reported revenue of $1.147 billion. Analysts think the company will be lucky to make $788 million this year, a 31% drop from just two years ago. That steep drop off has left a very bad taste in the mouths of video game investors.

Investing in a gaming company is risky, especially in one that has only a handful of games. Zynga's stock was destroyed when its most popular game, FarmVille, fell out of style. But I think it's early in the game for King. Unlike Zynga, King is profitable and that should provide some type of cushion for the stock on the way down. Once the stock stabilizes, I bet there will be a good entry point.

King should be able to knock out a few good quarters, which should drive growth investors into the stock. For now, I'll wait on the sidelines for an opening.

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