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King prepares to make its debut

King, which makes the popular game Candy Crush Saga, is to list on the stock market this week. Is it worth all the tech hype?

Perhaps it is best I have never played the Candy Crush game, that way I can look on the King flotation with dispassionate eyes. My closest experience is watching in a bemused fashion as people on the tube sit engrossed on their daily commute.

Our grey market currently suggests that we will see a market cap of around $8.9 billion for the digital entertainment company, a 15% premium to the projected level of $7.6 billion. The cynics in the stock market will proclaim that a company whose fortunes are based on one game cannot possibly be worth that; however, revenue in 2013 was $1.8 billion, with net income at $568 million.

Even the top end of our valuation would suggest that the company is worth around 15 times earnings. This is much less frothy than the valuations seen for some recent UK listings, such as the online retailer Boohoo.com. King’s income was just $7.9 million in 2012, so the company has clearly mastered the trick of boosting its bottom line.

The example not to follow is Zynga, whose shares are now at a fraction of their peak in 2012. In fact, Zynga is now embroiled in a case brought by investors alleging the company failed to provide sufficient information in its IPO.

The name and recognition of the Candy Crush name is likely to bolster King’s shares in their first days of trading, but in the long term investors should be more cautious. A company built on the fickle affections of casual gamers cannot afford to sit on its laurels. Even at 15 times earnings, the company looks vulnerable.

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