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4 stocks to watch before the King Digital IPO

Chris Lau, Kapitall: Keep an eye on these four stocks in the wake of the King Digital IPO saga.

When the King Digital (KING) IPO (initial public offering) completes on March 25, there will be 15.5 million shares sold to the market. At a price of up to $24, King will be worth as much as $7.6 billion. If markets hold up (it sold off heavily on March 13), King will be yet another successful IPO. Conservative investors might want to avoid King, and look elsewhere ahead of the IPO.

King is risky

King’s big achievement in the mobile space is its Candy Crush Saga game. At the high-end of the IPO Price of $24, King will open at nearly four times bookings of around $2 billion. By comparison, it will trade at half the market cap of Activision (ATVI), be on par with that of Electronic Arts (EA), and will dwarf Glu Mobile’s (GLUU) sub $400 million market cap.

Ever since Vivendi reduced its stake in Activision, liquidity for its shares improved and shares rose. A previous decision by the chancery court to halt Activision’s buyback was reversed. Unsurprisingly, short interest in its shares are down over 25% as of February 28.

Analysts expect positive momentum from Electronic Arts. Demand for its game, Titanfall may give its shares a boost.

Zynga (ZNGA) will most likely get the biggest boost ahead of King’s IPO. Zynga is moving aggressively into mobile, but is still be remembered as a company reliant on Facebook for growth. Back then, Zynga was best known for Mafia Wars and FarmVilleFarmville 2 will let users play offline on a mobile device. The game will also let users transfer goods between farms on Facebook and mobile.

Back when Facebook (FB) IPOd, LinkedIn (LNKD) received a boost in its share price by the start of 2013.

Despite the temporary boost for Zynga, risks are high for Zynga and King. Both rely on hit game titles for growth. EA and Activision proved they can produce winning titles, on top of growing sales for other game titles. Speculators will therefore favor Zynga and King, but investors who want exposure to the gaming sector will want EA and Activision instead.

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