Positive Ratings Boost Candy Crush Maker - Analyst Blog

Shares of King Digital Entertainment plc KING, the makers of the Candy Crush game, jumped 8.49% in Monday's trade as a number of analysts initiated coverage on the stock with a positive rating. King Digital is expected to report its quarterly earnings on Wednesday, before the opening bell.

Reportedly, two out of the three lead underwriters — JP Morgan JPM and Credit Suisse CS — were among the slew of analysts to initiate their coverage on King Digital on a positive note. Some other positive coverage was initiated by RBC Capital, Cowen and Stifel.

The analysts' positive stance on the stock points to the company's traction in the mobile gaming market. With the rapid adoption of smartphones and tablets, analysts expect the demand for King's mobile-based games to increase exponentially.

While 70% of revenues are derived from mobile platforms, King has also developed games for other platforms, which increases its relevance.

Notably, King Digital has 3 games — Candy Crush, Farm Heroes and Pet Rescue — which feature among the top 10 games on both Android and Apple's AAPL online stores. Of these, Candy Crush alone contributed 78.0% to the company's sales in 2013. Additionally, analysts believe that gamers' preference for free-to-play games bodes well for King Digital's future prospects.

Of course, considerable dependence on a single game could be its undoing. Given that King Digital derives the bulk of its revenues from Candy Crush, any disruptions, due to lower-than-expected user growth, may hurt overall results.

Moreover, the gaming industry remains highly fragmented and overcrowded with small but relatively well-known companies such as Zynga ZNGA. Therefore, competition from Zynga and other established players with a more visible business model like Electronic Arts EA, Activision Blizzard ATVI and Ubisoft should not be ignored.

Currently, King Digital has a Zacks Rank # 3 (Hold).