Article / 27 March 2014 at 9:30 GMT

King's IPO slaughter reflects toxic trend in momentum stocks

Head of Equity Strategy / Saxo Bank

• King Digital IPO slumps to end session 16% down
• Reflects market risk-off appetite for high-tech stocks
• Gaming sector anticipates possible benchmark adjustment

By Peter Garnry

I was wrong on King Digital's IPO as it turned out to be the worst start to an IPO since Chegg's offering last November. Despite a lower IPO price, I failed to account for this negative signal because news sentiment quantitatively was actually quite positive just before trading. However, I did recommend using tight stops as a precaution against a shift in sentiment so adept traders should have survived what looked like a trench war at one point. 

Was it an overreaction?

King Digital's new shares were priced at USD 22.50 per share but due to weak demand they opened at 20.50 with wild swings between 21.35 and 19.10 within the first 10 minutes. What happened next was in fact just a continuation of a toxic trend recently observed in US equity markets with momentum and high valuation stocks getting killed everywhere. King Digital's shares fell for the rest of the session ending down 7.3 percent from the open and 16 percent from the USD 22.50 pricing.

King Digital share price

Source: Bloomberg

It seems like an overreaction given the stock now trades around 30 percent below S&P 500 valuation and no new data points on user trends and monetization. If it on the other hand, it represents the new anchor for valuation in gaming stocks, then Zynga and Glu Mobile stocks are in for a volatile downward ride.

What is going on?

What partly happened to King Digital yesterday was related to the recent crash we have monitored in momentum, biotech and high valuation stocks. Yesterday was yet another mini-crash for momentum and biotechnology stocks. The five biggest gainers in percentage terms over the last three months in the Russell 1000 were down 1.7 percent (see chart) on average compared to 0.7 percent for S&P 500 and Nasdaq Biotechnology Index was down 1.9 percent. The 10 percent most expensive companies measured on 12-month EV/Sales ratio were down 1.5 percent on average. King Digital's IPO was partly a victim of the sell-off in momentum and the lack of market strength in general.

Momentum stocks in Russell 1000

Peter Garnry is the Head of Equity Strategy at Saxo Bank. More of Peter's articles and trades are available here on our exciting copy trading platform.

Peter Garnry Peter Garnry
King Digital is up 2% in pre-market trading.


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