Candy Crush Saga Gets Shaken

Yesterday, shares of this Internet game maker's initial public offering (IPO) suffered a hit, on fears of being a one-trick pony, and MoneyShow's Jim Jubak considers the impact it may have on several US companies.

Yesterday's rout in the initial public offering (IPO) of King Digital Entertainment (KING), the maker of the Internet game hit Candy Crush Saga, has savaged Internet game stocks across Asia today.

Shares of US game makers such as Electronic Arts (EA) have fallen slightly, but US Internet momentum favorites such as Facebook (FB) have been largely immune. (Maybe because they've been punished previously in what looks like a top in momentum favorites.)

Yesterday, shares of King Digital, initially priced at $22.50, closed at $19 on fears that the company is a one-trick pony and that this pony, Candy Crush Saga, has already peaked. Gross bookings, a measure of how much players of the game pay for items for sale in the game, fell in the fourth quarter of 2013. King Digital gets 78% of its gross bookings from Candy Crush.

In Asia today, Tencent Holdings ((HK:700) in Hong Kong and (TCTZF) in New York) closed down 5.9% in Hong Kong. The company, know for its WeChat mobile messaging platform (with 355 million average monthly users), made $100 million in revenue in the fourth quarter from games, such as Cross Fire and League of Legends on the WeChat platform. Naver (KS:035420), a Korean company that, like Tencent, combines mobile messaging with games, dropped 3% in Seoul.

Back in the United States, shares of Electronic Arts, the second largest US game maker, were off 0.58% at the close in New York. Shares of Facebook were up 0.72%.

The huge drop in King Digital, and in Asian players, such as Tencent, is at least partly attributable to growing fears that valuations in the sector have climbed too far too fast. The Bloomberg Asia Pacific Internet Index is up 53% in the last 12 months, even after dropping 3.3% today. In contrast, the Morgan Stanley Asia Pacific Index was up less than 1% in that period. The stocks in the Internet index trade at 28 times projected earnings for the current fiscal year. That's twice as expensive as the regional index and represents the biggest premium for Asian Internet stocks since 2006, Bloomberg calculates.

The Asian sell off also follows on the heels of similar worries in the US Internet sector. Facebook, for example, fell 6.9% yesterday, March 26, after announcing yet another acquisition, the $2 billion purchase of virtual-reality technology company Oculus VR.

I'd draw a big distinction between companies like King Digital, which are dependent on a constant stream of new hit games to replace current hits, and companies such as Tencent, which have built massive distribution platforms that they can use to sell everything from online games to financial products.

A sell off on valuation will hit both a King Digital and a Tencent—and I'd sure like to see Tencent's valuation come down before I buy more shares. But I also know what kind of company—Tencent and Alibaba (soon to go public), for example—that I'd like to buy after any correction.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Tencent Holdings as of the end of December. For a full list of the stocks in the fund see the fund's portfolio here.