Mobile gaming giant King Digital Entertainment Plc. (KING, Financial) has been in the news recently and not for the best of reasons. Allegations of failure to disclose the true number of paying players of its wildly successful game, Candy Crush Saga, by an investor are a matter of legal scrutiny and the verdict will take a while to come. But even as per the complaint, the allegations of wrongly reported figures of paid users has already been factored into the stock price by the market. Even for an industry that is generally doing badly at the bourses; this fact may be a contributing factor to the stock’s dismal performance when compared to competitors like Glu Mobile Inc. (GLUU, Financial) or Zynga Inc. (ZNGA, Financial) in the period King’s stock has been around. So, where will the King stock go to from here?
Not a one-trick pony
One of the main reasons the stock seems to have suffered in the market is from its perception of being heavily reliant on one game alone: Candy Crush Saga. However, that is clearly a misconception. In the fourth quarter of 2013, over 75% of the company’s earnings came from that one game alone, and investors got spooked when the growth of the game’s user base slowed down. However, one year later, in the fourth quarter of 2014, the same game contributed only 45% of revenue. The company has launched other games, albeit based on similar gameplay, such as Candy Crush Soda Saga, Farm Heroes Saga and Bubble Witch 2 Saga. All these games are also quite successful, making over $600,000 daily from U.S. iPhone gamers alone.
Acquisition of Z2Live
Even with the other games the company has launched on its own, it still runs the risk of losing paid users who are tired of the similar game structure used in all of them. In this respect, the acquisition of Seattle-based Z2Live is a very smart one, as the acquired company makes strategy-oriented games which are very different from the match-three-of-a-kind games made by King. Battle Nations, a multiplayer strategy game from Z2Live, makes more than $11,500 from U.S. iPhone gamers already.
Other versions
In August 2014, King launched Candy Crush Saga in China on Tencent Holdings’ (TCEHY, Financial) mobile platform. The Chinese market is a very lucrative one, and this should bring in substantial additional revenue for the company.
In addition, the web-based version of King’s games, especially Candy Crush Saga, is still the number one app on Facebook (FB, Financial). This includes not just gaming apps but all sorts of apps taken together.
Other factors
With good quality Android and Windows-based phones becoming cheaper, the use of smartphones is only going to increase, and this will mean a larger user base for mobile game developers such as King. At least some of those users will turn in to paid gamers and it will add to the revenues for King.
There is also the factor of a low public float which might be keeping the share prices down. The Irish gaming company has about 322 million shares outstanding and a public float of less than 40 million shares. According to Michael Pachter of Wedbush Securities, “There are big investors who are poised to own King, but they can’t get the shares.”
Conclusion
The Candy Crush Saga is still going strong; both in terms of daily user spend and new download. The company has diversified its portfolio by introducing new games and acquiring Z2Live. And the market has already punished the stock significantly, making the current levels extremely attractive to enter the stock. We strongly recommend a BUY on this stock.
