Why the King IPO Tastes Bad for Investors

King IPO update: King Digital Entertainment, maker of several hit social Internet games, filed for a U.S. initial public offering (IPO) with the U.S. Securities and Exchange Commission today (Tuesday).

The stock will be listed on the New York Stock Exchange under the symbol "KING," with J.P. Morgan Chase & Co. (NYSE: JPM), Credit Suisse Group AG (NYSE: CS), and Bank of America Merrill Lynch (NYSE: BAC) leading the process.

With today's filing, King gives investors a glimpse at what they'd be buying with a King IPO or stock investment. Check out these shocking usage numbers from King and the Internet gaming industry, straight from today's filing:

  • King's game "Candy Crush Saga" is played by 93 million people daily, and with more than 1 billion plays every day.
  • Candy Crush is presently the No. 1 game on Facebook (Nasdaq: FB), with two other King games - "Pet Rescue Saga" and "Farm Heroes Saga" in the second and third spots, according to app tracker AppData's January numbers.
  • King is killing it on mobile, with a whopping 500 million downloads on mobile devices. Candy Crush and yet anotherKing game, "Papa Pear Saga," are among the 10 most-downloaded apps on Apple Inc. (Nasdaq: AAPL) devices, according to app tracker AppAnnie's December data. And for more than a year, Candy Crush has been tied with Supercell's "Clash of Clans" and "Hay Day" as the top-grossing iOS and Android game.
  • King employs 665 people and posted a profit of $567.6 million on revenues of $1.89 billion in 2013, up from $7.8 million in 2012. Around 78% of revenue came from Candy Crush.

Even with the strong usage numbers, it's King's monetary model that will prove to be the downfall for investors...

The company's game downloads are free. Instead, the company turns a profit from users who buy items to help them advance in-game. About 4% of its daily user population buys such "power ups," wholly accounting for King's massive revenue.

The profit set up is a lot like Zynga and its free-to-download game "Farmville," which proved to be an IPO disaster for investors.

In 2011, Zynga Inc (Nasdaq: ZNGA) priced its IPO at $10 a share, making it the biggest Internet IPO since Google's (Nasdaq: GOOG) back in 2004. By early 2012, Zynga was worth $11.5 billion.

But soon after the IPO, Farmville's viral popularity began to wane.

Between March and November 2012, Zynga stock prices fell more than 80% and it was forced to drastically downsize. Zynga stock presently sits at $5.09 per share; it hit a 52-week low of $2.50 per share and a high of $5.15 per share.

Still, the factor that will deter investors the most isn't King's similarity to Zynga.

It's this number that was released with the filing today...

King IPO: The Biggest Investor Takeaway

King revealed today 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. "For investors, this is probably nothing more than a fad."

Much like Farmville's viral burst and decline, King's games are likely to suffer the same fate. And those monthly "power up" buyers that account for King's billion-dollar-plus revenue will fade with it.

"This is a trade if you're nimble and quick about it, perhaps, but it certainly doesn't fit my idea of an investment," Fitz-Gerald said.

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