Can King Regain Its Crown?

It’s probably fair to say that King Digital Entertainment’s experience of the stock market so far has been less than pleasant.

The company launched on the markets on  March 26, selling its shares for $22.5 each. That valued the company at a little over $7 billion, a high valuation for a mobile gaming company, which tend to be viewed warily at best by most traders and investors.

But King’s biggest app, Candy Crush Saga, was the most downloaded app for iOS last year, estimated to earn $633,000 per day from America alone in July. Across all platforms, the app has been installed well over 500 million times.

Such staggering figures failed to impress investors however, and King’s debut on the markets saw their shares drop from $22.50 – the middle of their initial range of $21-$24 – down to $19 by the end of day one. In a single day, King had shed $1 billion off of its valuation to end up at $6.03 billion. That brought it straight down to the level predicted by IG’s IPO grey market, where investors speculated a $6 billion day-one value.

The IPO still raised slightly more than Zynga’s, whose poor performance may well have had a denigrating effect on King. The biggest negative levelled at Zynga was an overreliance on Facebook as a platform though, and King had already shown dominance on mobile, a far more profitable area.

Instead, investors looked beyond the phenomenal success of Candy Crush Saga and saw little else to recommend King. Their four other games  released on the App Store have all failed to replicate the success of Candy Crush so far, a major problem for the company. King itself all but announced how problematic their reliance on Candy Crush was in their Q1 2014 earnings call:

‘The fact that a relatively small number of games continue to account for a substantial majority of our revenue and gross bookings, and declines in popularity of these games could harm our financial results.’

Statements like that contributed to further poor performance in King’s stock, which dropped from $18.76 to $16.25 on the day of that earnings announcement. It went on to hit a nadir at $15.32, giving the company a market cap under $5 billion for the first time.

Faith was restored, for a time, but traders showed a real reluctance to let King rise above its initial IPO price, with the company peaking at $22.53 before immediately retreating back to the $19 level.

Another earnings announcement on August 12 gave King a chance to deliver some positive news and turn things around. Despite earnings meeting expectations, revenue missed by $12.5 million and the company has revised its outlook for the rest of the year. The markets reacted badly to such negativity from a supposedly growing stock, which has now hit a new low, trading at $14.

King needs to demonstrate that it will continue to drive revenues as Candy Crush Saga starts to fall out of favour, and there are signs that it may be able to do just that. 80% of revenue came from its flagship app last year. Now the figure is half of that, without revenue dropping off accordingly.

Clearly, King has some way to go before it can convince investors that it isn’t a one hit wonder. If you believe in its ability to continue creating profitable games, though, now might be a good time to take a position.

Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

This information has been prepared by IG, a trading name of IG Markets Limited. The material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.