King Digital (KING, Financial) has been one of the most successful companies in mobile gaming over the last few years. The company triumphantly entered the world of mobile games in 2012 when it launched Candy Crush Saga, which still remains its best franchise in terms of downloads, gross bookings and revenues.
Since then King Digital has launched a handful of mobile gaming apps that have failed to match the success of Candy Crush Saga. However, two of these have come close and together with Candy Crush Saga are now among the top 10 grossing gaming apps in iOS-U.S. and Google Play-U.S., as well as Facebook-Worldwide.
As of April, King Digital’s Candy Crush Saga and Candy Crush Soda Saga were among the top five grossing mobile gaming apps in the U.S. for iOS and Google Play, while Farm Heroes Saga appears among the top 10.
Note: Rankings based on April data via King Digital presentation.
Now, as per the figure above, it is quite clear that King Digital’s Candy Crush Saga, Candy Crush Soda Saga and Farm Heroes Saga have been dominant in the mobile gaming marketplace, but the question that remains is whether they can carry this mantle to the foreseeable future.
The company’s Bubble Witch 2 Saga and Pet Rescue Saga are the other two notable franchises, but they have failed to make it to the top 10. Candy Crush Saga continues to produce nearly 40% of the company’s gross bookings as per Q2 results, but recent performances have indicated a slowdown in the company’s biggest game.
One of the biggest challenges for the gaming industry is to maintain player interest with regular updates. This means being able to create heirs to top games, and currently this is King Digital’s biggest challenge.
The company also faces a challenge from other competing mobile games which are free to download like Clash of Clans as well as other gaming platforms. For more information about possible rivals to King Digital’s mobile gaming dominance visit here.
The company’s other gaming franchises have failed to completely cover for the gross bookings decline experienced by Candy Crush Saga, and this suggests that the company’s new gaming apps are not generating as much interest as their predecessor.
Therefore, Candy Crush Saga investors will be watching the stock closely to see how long the slowdown continues to determine whether King Digital can maintain its dominance in the market.
Why the share price fell after Q2 results
King Digital reported Q2 results for the period ended June 30 on Aug. 13. Just a day before the announcement date, the company’s shares had declined from $16.10 to trade at about $15.30 as investors anticipated a disappointing quarter.
After the announcement, shares of the company declined further by nearly 17% to trade at $12.72 within the next 10 days as results came out worse than expected.
However, the company’s stock has since recovered significantly to trade at about $15.00 per share and looks set to continue on the current uptrend with the immediate target price at $16.00. Nonetheless, with the company set to announce Q3 results on Nov. 4, investors will be mindful of another post-earnings plunge, and this could halt the current rally.
In Q2, King Digital reported revenues of $500 million from $529 million gross bookings compared to last year’s figures of $593 million and $611 million respectively. Adjusted EBITDA margin was down 1% point to 41% from 42% reported last year, while EPS declined to 49 cents from 59 cents in comparable periods.
The company launched new games including AlphaBetty Saga and Paradise Bay, which expanded its portfolio into new resource management genre and also launched Scrubby Dubby Saga on Facebook (FB, Financial) as it aims to continue capitalizing on the social media giant’s expansive user base.
Overall, King Digital has failed to impress since going public in March last year. The company’s net income and operating cash flows for the trailing 12-month period are down compared to the pre-IPO figures as demonstrated in the chart below while revenues are up only 13%.
King Digital net income is down 0.33% while operating cash flows are down nearly 6%. However, the company hit its best form yet mid last year when both revenues and cash from operations increased by more than 25% on a TTM basis, while net income was up 20%.
As such, the current performance levels indicate a massive decline from achievements of last year (through July), and this is a clear indication that the company’s business is slowing.
Should you buy, sell or hold King Digital?
King Digital currently trades at 8.58x in P/E ratio for the trailing 12-month period while the forward P/E for the period ending Dec. 31, 2016 is pegged at 8.97x. This suggests that there is little or negative growth in EPS expected between now and then. The company’s PEG (five-year expected) ratio of -1.05x also suggests a negative growth in EPS, which could result in a decline in share price. These figures compare to industry averages of 20.86 P/E and 1.64 PEG ratios, with the P/E suggesting that King Digital is cheaply priced.
However, the low P/E is also indicative of the lack of willingness by investors to pay a hefty premium for the stock as they fear the stock’s ability to reward their optimism. As such, investors who already own the stock and cannot profit by selling now would be in a better position holding and possibly adding when the share price falls further (to about $12.00) to help in cutting down their net cost per share.
The upcoming earnings event on Nov. 4 could also play a crucial role if the market responds in the manner it did in the previous quarter.
Conclusion
The bottom line is that King Digital is trying to refresh its gaming franchises but so far, none of the new games has managed to hit the heights achieved by Candy Crush Saga. In addition, competition is increasing, and it is not coming from just mobile platforms but also desktop and game consoles.
As for now King Digital appears to be the type of stock that investors need to keep an eye on for a possible purchase in the future as the company continues to try to maintain leadership in mobile gaming. However, with Candy Crush Saga fading, it remains to be seen whether or not King Digital will continue to be among the top five or top 10.
