King Digital (KING), like Zynga (ZNGA) before it, is learning just how hard it is to gin up hit titles. Shares of KING have fallen 11% so far this year, while Zynga is up about half a percent. Now KING stock is encountering more pressure on its hull after putting down a ho-hum quarter that sits in the part of the brain filed under “lukewarm.”
King is down about 10% in Friday’s early trading after reporting second-quarter revenue declines of 18% and earnings of 49 cents per share. The Street was looking for revenues of $490 million (against King’s $489.5 million) and earnings of 42 cents per share.
But the reason for KING stock’s free fall was the weak guidance: King is forecasting current-quarter bookings of $460 million to $480, compared to $529 million in the last quarter. This is far below the consensus estimate of $516 million in bookings.
Then there’s King’s deteriorating user growth: Monthly active users totaled 501 million in the latest quarter, down 9% from the prior quarter, while daily active users were down 10% to 142 million.
King’s dependence on a single game — Candy Crush Saga — hasn’t done KING stock any favors either. While Candy Crush Saga ranks in the top-10 games for the Apple (AAPL) App Store and Google (GOOG, GOOGL) Play Store, interest in it is dwindling, as will King’s revenues since about 40% of its bookings come from Candy Crush.
KING has extended the life of its Candy Crush series to the inevitable breaking point. New levels, extensions, sequels and even spin-offs like Candy Crush Soda Saga, contribute to the notion that King desperately needs people to continue loving Candy Crush. Ask none other than Zynga about how fickle the gaming audience can be. ZNGA stock collapsed because many of the company’s core franchises quickly lost market share from sudden consumer disinterest.
But KING has been plowing money into the development of new titles. Some of the latest include AlphaBetty Saga (a word game), Paradise Bay (a resource game that takes place on a tropical island) and Scrubby Dubby Saga for Facebook (FB), which is a slider game. For the most part, there appears to be some traction with all of them. But the gaming industry is notorious for early flameouts.
When it comes to KING stock, though, its valuation is fairly cheap — price-to-earnings ratio is a mere 7 and King’s been cranking out some pretty juicy cash flows. And in Q2, EBITDA came to $207 million, bringing the total cash in the bank to $786 million, and EBITDA margins have been more than 40% for eight consecutive quarters.
But this really does not mean much for KING stock. For the most part, investors want to see growth from arguably one of the hottest sectors in mobile. But the market is also extremely tough to play in, and investors would rather just wait for the next big hit before paying up for the shares.
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.
