Shares of King Digital Entertainment PLC (NYSE:KING) plunged 11% in after-hours trading yesterday following weak guidance from the mobile game developer behind the popular Candy Crush franchise.
KING earnings actually weren’t too shabby, though, and the stock is only off by 3% or so in midday trading on Friday.
Listen, KING stock isn’t the worst investment I’ve ever seen, but that’s far from calling it a wise one.
Investors — especially value-oriented ones who might find themselves enticed by the stock’s rock-bottom price-to-earnings ratio of 8 — should do themselves a favor and stay far away from this bad boy.
A Look Into KING Earnings
Outside of its anticipation of soft second-quarter bookings, the KING earnings release wasn’t too shabby. Q1 adjusted earnings per share of 61 cents per share breezed past Wall Street’s 53-cent estimate. Gross bookings of $604.5 million also topped analyst calls for $589.7 million.
Unfortunately for anyone who owns KING stock, we live in a world where investors care about expected future results, not just past results. And the future — at least the immediate future — looks rather bleak.
Management expects gross bookings to sequentially decline in a major way, from $604 million in the first quarter to somewhere between $490 million and $520 million in the second quarter.
While what we’re seeing in the stock market today sure doesn’t reflect an over-abundance of bulls plowing into KING stock, I have no doubt that more than a few contrarians are eying shares eagerly, attracted by the siren-like lure of that oh-so-luscious, single-digit P/E.
Please, for your own good, do not heed their call. It’s a classic value trap.
Those swooping in on KING stock today looking to pick it up on the cheap will get crushed — and no candy will be involved.
It’s not really King’s fault; in fact, I think it’s a very well-run company. Unlike many game developers, it has been profitable for years, and it has been running with its greatest success, Candy Crush Saga, even releasing a successful spinoff called Candy Crush Soda Saga (though while successful, even Soda has slipped on app store rankings of late).
Sadly, KING stock is doomed to underperformance merely because of the nature of its industry. You always have to develop a new hit game, or risk falling victim to the capricious tendencies of gaming trends.
Take Zynga Inc (NASDAQ:ZNGA), for example: Its stock is still down about 70% from its IPO in late 2011, as its blockbuster game, FarmVille, proved to be a game driven by brief success on Facebook Inc (NASDAQ:FB) than the cornerstone of a strong business.
Sure, one can easily point to the success of Glu Mobile Inc. (NASDAQ:GLUU) stock, which is up 75% in the last year on the heels of 111% revenue growth in 2014.
But that doesn’t change the fact that its Kim Kardashian games probably won’t be hauling in millions for GLUU 15 years from now. (At least I hope it won’t be, if only from a purely cultural perspective.) If history is any indication, these too will be a flash in the pan, leaving GLUU to rely on creating yet more hits.
In the end, KING stock faces the same long-term uncertainty as its peers. Buyer beware.