Wedbush's Pachter Downgrades King Digital

• King Digital Entertainment PLC KING shares have gained 16 percent year-to-date, even after hitting a low of $12.72 on August 24.
• Wedbush's Michael Pachter downgraded the rating on the company from Outperform to Neutral, while maintaining the price target at $18.
• King Digital’s shares are now trading close to the deal price, as the company approaches acquisition and slows the decline in bookings, Pachter mentioned.

King Digital reported its 3Q results ahead of expectations, with bookings of $502 million, as compared to the Wedbush estimate of $490 million estimate and its guidance of $460-$485 million. Adjusted EBITDA came in at $180 million, higher than the Wedbush estimate of $173 million and the consensus expectation of $161 million.

King Digital guided to Q4 bookings of $475-$500 million. Analyst Michael Pachter wrote, “Based on King’s brief history, it appears to us that the company is intent upon exceeding the high end of guidance, suggesting that Q4 bookings will be sequentially flat.”

Although the company has not given EBITDA guidance, the stable bookings outlook reflects “a high likelihood that King’s overall profitability is stabilizing as well,” Pachter said.

King Digital recently launched two new games, and is scheduled to launch another two games in 2016. “We expect King’s foray into the world of mid-core player vs. player games to yield positive results,” the analyst commented.

Activision Blizzard, Inc. ATVI has agreed to acquire King Digital for $18 per share in an all-cash deal. Once the acquisition has been completed King Digital will operate as a division within the Activision umbrella.

“Given the company’s pending acquisition by Activision Blizzard at our target price, shares are unlikely to appreciate significantly,” Pachter added.