Don't Kid Yourself -- King Digital is Dangerous

Even though King Digital Entertainment has three games in the top 10 on the iPhone platform, there are risks you should know about.

Mar 30, 2014 at 3:30PM

Last week, King Digital Entertainment (NYSE:KING) became a publicly traded company in a remarkably bad IPO. Some pundits in the financial media, including Bob Pisani on CNBC's FastMoney, seemed to downplay the issues with the company. But complacency in discussing the facts surrounding recent IPOs may pull in individual investors unaware of the risks.

There is the possibility of King's Candy Crush reaccelerating growth in its subscriber base or new King games providing additional revenue streams, but if you are considering investing in shares of King, you need to understand the risks.

Revenue declined in December
In the December quarter, the company recognized $602 million in revenue, which was down 3% from the $621 million it recognized in the September quarter. Making anywhere near $602 million for a company in existence less than two years is very impressive, but it's still slowing.

This wouldn't be an issue if there were high competitive barriers or switching costs, but there really aren't any. If a customer decides to stop buying add-ons for his or her games, the revenue just stops. Immediately.

Average monthly unique payers declined in December
The quarterly average for monthly unique payers declined in December. If this represents an inflection point, revenue and profits could fall off a cliff. The chart below shows a drop from the average of 13 million to 12.1 million, but we don't know if this is gradual, or if users peaked and are falling.

Source: F1 filed with the SEC 

The rate of decline could be worse than the chart above indicates
The chart above shows what traders might consider a consolidation, but the monthly data could look very different. We don't know the shape of the curve, but the company offered some clarity in the F1:

We believe the movement is as a result of less payment activity among occasional payers in our earlier Saga games, such as Bubble Witch Saga and Candy Crush Saga, in North America where we have enjoyed a rapid proliferation of network and payer growth.

Since the shape of the curve can take different forms, we put a sample together of two different scenarios. Neither one looks good, but one -- the dotted line on the chart below -- is dramatically worse than the other.

Source: Author's estimates for monthly data and company provided averages for the quarter. Figures shown in thousands.


Source: Author's estimates. Figures shown in thousands.

We don't know which of these scenarios will play out. These are only estimates for display purposes. The trend could reverse itself in the coming quarter. But either of these two scenarios is a possibility.

King paid out more in the last five months than it raised
At the IPO price of $22.50, the deal raised $350 million for King and $150 million for early investors, such as private-equity firm Apax Partners. The company and its shareholders sold 22.2 million shares, plus the underwriter greenshoe of an additional 3.3 million shares. This leaves the company valued at $7.1 billion.

However, the early investors have already been raiding the company's cash hoard. In the last five months, King Digital paid $504 million in cash dividends to its shareholders, This came in not one, but two, dividends: $287 million in October 2013 and $217 million in February 2014. Why are the investors so eager to get their cash back?  

If investors who may have visibility into the monthly trend of active payers pulled out the cash assets of the company before the IPO, should individual investors wait and see if that cash will be replaced?

Don't kid yourself, it is a "one-trick pony" right now shows that King has three of the 10 top-grossing games on the iPhone platform. This doesn't directly translate into revenue, but it does give an indication that the company can produce multiple high-ranking games. However, King still needs to show that it can derive revenue from these other games.

Candy Crush had 97 million average daily users in January, according the revised F1. But it drops off precipitously after that. The other two games in the top 10 are Farm Heroes and Pet Rescue, which have 20 million and 15 million, respectively.

Know the risks if you're going to invest
When Tim Seymour asked Pisani if recent IPOs like A10 and King selling off was a sign of sanity in the markets, he was chastised with phrases like "[King is] not a one-trick pony," and, "This was a good representation of the IPO market -- well-known, big name." This is misleading, and it could be dangerous for investors who haven't read the filings.

Consider the following about King Digital:

  • It has declining customer growth in the one product that accounts for more than 75% of its bookings.
  • It has investors who felt the need to pull money out just one month before the company went public.
  • It has a CFO who has been with the company for only six months.
  • Financial media seem to be pumping up the importance of the company.

It may be worth waiting to see the next quarter's results.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.


David Eller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers