King Digital Entertainment (KING), the developer of Candy Crush Saga and other popular mobile games, has had a tough time since its IPO in late March. The offer price was $22.50, which was at the midpoint of the range of $21 to $24, and quickly fell to $15.21. But over the past week, King stock has had a nice run, trading up around $21.
Might this the start of a bull trend? Or should investors still be cautious?
Keep in mind that a key to the move in King stock has been positive notes from various Wall Street analysts. Just look at JP Morgan’s (JPM) Dough Anmuth. According to his analysis, King stock could get a nice boost from the continued strength in free cash flow generation, which he thinks will exceed $800 million this year. He even thinks the company may return some of this cash to shareholders either via dividend or share buybacks. Anmuth has a price target on King stock of $30 by the end of the year.
Now there are still some doubters, such as Sterne Agee analyst Arvind Bhatia, who believes that the run-up has mostly been the result of a short squeeze (this is when short sellers buy back shares to cover their positions). That would make the “recovery” in KING stock a temporary thing.
Besides, the mobile gaming market is notoriously tough. Zynga (ZNGA) shows that a company can easily get stuck in a dry spell of creativity. There is also tremendous competition. Some of the mega players include Kabam, Supercell, EA (EA) and Gameloft.
Despite all this, KING stock may still be an interesting opportunity for investors. While Candy Crush Saga still represents a big chunk of revenues — coming to 67% in the latest quarter — other titles are pulling their weight, as well. Consider that two other ones — Pet Rescue Saga and Farm Heroes Saga — are among the 10 top grossing games on Apple’s (AAPL) iOS and Google’s (GOOG) Play.
King also has a massive platform, which attracts 143 million daily active users and gets 1.4 billion game plays per day. Despite the huge size, the market opportunity still remains substantial. Based on research from Strategy Analytics, the global smartphone installed base is expected to grow at a 26.6% annual rate until 2016, reaching 3 billion units. As for tablets, the rate is forecast to ramp at 40.5% during the same period and hitting 983 million units. And yes, mobile games are likely to remain one of the top uses for such devices. In fact, IDC believes that smartphone and game revenues will grow at an 18.3% annual rate until 2017 and reach about $14.5 billion.
King stock is still trading at a reasonable value, with the price-to-earnings ratio at only 10, compared to 25 for Activision Blizzard (ATVI) and EA’s 11.
Yet King’s growth has been stronger — and that growth is likely to continue. After all, the company has been aggressive with the launch of new games, such as Candy Crush Soda Saga and Bubble Witch Saga 2. At the same time, King is finding savvy ways to boost the longevity of existing titles. Perhaps the most notable example is a deal with Tencent (TCEHY) to create a Chinese version of Candy Crush Saga.
Again, the risks for King stock are still real, especially given the fickleness of gamers. But the company is showing signs that it can go beyond its reliance on Candy Crush Saga. In other words, for investors looking for a way to play the megatrend in mobile games, King stock looks like it could be a winner.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.