Bear of the Day: King Digital Entertainment (KING) - Bear of the Day

Candy Crush was easily one of the most popular games of 2013. The simple, but challenging, game had players match different colored candies in order to advance levels and proved highly addicting to many.

This game was pulling in over one million dollars a day in revenue for King Digital Entertainment KING and was one of the chief reasons for the company's recent IPO. However, many users (including myself) have abandoned the game in recent months, leading to questions about Candy Crush's longevity and its status as a revenue engine for KING.

For a lot of companies, this might not be a problem, as they could have other games in the pipeline ready to replace older games as they lose their luster. But KING really has nothing of consequence coming down the pike and many investors are getting very worried about the company's medium term prospects as a result.

These concerns are best evidenced by the company's recent earnings report, as well as KING's stock price movement as of late. After all, KING has seen its shares crater by over 25% in just the past three months, and given the company's near term outlook, this may just be the start of KING being crushed down before the end of this year.

Outlook & Recent Earnings

For the company's most recent earnings report, KING actually managed to just edge out the Zacks Consensus Estimate, posting EPS of 52 cents compared to a prediction of 50 cents per share. Yet while the company beat the number on the bottom line, the top line was a little weak, as it missed the $618 million revenue consensus, reporting $593.5 million in revenue instead.

In addition to this disappointing revenue number, the company also ratcheted down its expectations for the full year revenues, moving its EPS estimate to between $2.25 billion and $2.35 billion, a modest cut from the prior guidance of $2.55 billion to $2.65 billion. And given the decline in popularity of Candy Crush, these numbers may actually prove to be too optimistic anyway.

In fact, analysts have been slashing their full year earnings expectations for KING lately, sharply pushing the consensus estimate lower for both this year and next. And with such drastically reduced earnings expectations for KING, it will be tough for the company to rebound soon.

This is especially true when investors consider the magnitude of the cuts to earnings estimates lately. The current year consensus has plunged from $1.91/share 30 days ago to just $1.65/share today, while the next year figure has fallen from $2.17/share to just $1.34/share over the same time period.

Thanks to these factors, it shouldn't be too surprising to note that we have assigned KING a Zacks Rank #5 (Strong Sell). In other words, we look for the company's recent bear run to continue, and for more pain to be ahead for this troubled stock.

EA: A Better Choice?

If investors are looking for a better selection in the video game world, Electronic Arts EA, may be more favorably positioned right now. The stock has a much stronger game pipeline than KING, and has several stable title franchises too.

Additionally, it is forecast to see 16% EPS growth this year, while earnings estimates have been rising lately, giving the security a Zacks Rank #2 (Buy). Given this, EA may be a better pick for investors in the video game world right now, and especially so when compared to KING with its troubled outlook.
 
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