What Does This Mean for the Sector?

03/31/2014 12:01 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

The tech company behind the popular game Candy Crush Saga just went public with disappointing numbers and MoneyShow's Jim Jubak questions what it could mean.

King Digital (KING), the company that owns the fabulously successful Candy Crush Game, went public on March 26 and it did not really do that well. It was an IPO with a lot of expectations because it was a really hot game. It was priced at $22.50. It closed for the day at $19, that is, priced at $22.50 and closed at $19, and that is what is called a loss.

We have not seen a whole lot of those in the Internet sector; in fact, this has been a really hot sector. There are a couple of things here. Some bad timing is one of them, that you are seeing momentum in this sector where many stocks in this sector pull back and sell off, so it is hard to get higher prices out of this. People do not really want to buy it, but really, the worry here is that what we are seeing is valuations get stretched. This is a company which people are worried it might be simply a one-trick pony. Candy Crush has been an incredibly popular game, but what do you for an encore? In the fourth quarter, what is a metric that measures how much money players of the game use to buy stuff that is available in the game, actually, fell in the fourth quarter. The worry here was that valuations are high; we are seeing, really a bubble, and so let’s not put any money into it. Whether this has any implications beyond this particular company is a really good question.

Asian Internet stocks like Tencent Holdings (TCTTZF) fell the day after this IPO did not work. Facebook (FB) fell the day of the IPO, so there is a lot of worry about valuations in this sector as a whole. The Bloomberg Asian Pacific Internet Index is up 54% over the last year and, considering that the NSCI, the Morgan Stanley Capital International and Asian Pacific General Index was basically flat during that period, you can see where there might be some valuation questions here that people looking at this go, “Okay, so the Internet Index is trading at about 28 times fiscal year earnings, that is about twice what the Asian Pacific Index is trading at and that is a very high premium.” We have not seen a premium for Internet stocks in that area that high since 2006. You are getting a lot of rethinking about valuations, a kind of going back and saying, “Oh, well gee. Facebook paid $16 billion or $18 billion for what is an app, is that really a sign that we are beyond reasonable valuations?”

We have had a lot of acquisitions by Chinese Internet companies like Ali Baba and Tencent, so you are getting a rethinking here. Whether this is part of a general pullback in the whole market, as momentum stocks take a breather, is a very good question and I will look at it to see. The question is, “Yes we know why people did not put money into King Digital to drive it up,” but now the question is well how far out does that particular stone ripple into the sector and into the stock market as a whole.

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