UPDATE: The King IPO Price Is Another Bad Signal for Investors

KING IPO Price Update: Dublin, Ireland-based King Digital Entertainment PLC (NYSE: KING) priced its initial public offering (IPO) on Tuesday evening at $22.50. That gives the King IPO a valuation of around $7.1 billion, making it the largest U.S. IPO from the mobile gaming industry in history.

KING stock will debut on the New York Stock Exchange today (Wednesday). The company offered 22.2 million shares at $22.50, raising about $500 million. J.P. Morgan Chase & Co. (NYSE: JPM), Credit Suisse Group AG (NYSE: CS), and Bank of America Merrill Lynch (NYSE: BAC) are acting as lead joint book-running managers for the offering.

The Candy Crush maker's $7 billion valuation is nearly 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's 2011 IPO valued just below King's, at $7 billion, and at $10 a share. At the time, Zynga gained the honors as 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 more than 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 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."

Today's King IPO price just added 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."

Stay tuned for an update on King's stock performance debut today - a metric for investors that speaks louder than Tuesday's King IPO price tag.

"What's more important than the price is how it trades tomorrow and in coming sessions," Sterne Agee analyst Arvind Bhatia said to Reuters. "If the investors are in because they expect a quick profit and it doesn't happen because it doesn't get a lift, people will exit quickly."

While King flops, you can profit elsewhere: Buy These Shares... Before Google Does.

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