Why You Should Ignore King Digital and Consider Zynga

Apple (NASDAQ: AAPL  ) is a big growth driver for all mobile gaming companies. Glu Mobile derives about 64% of its revenue from Apple, while Zynga (NASDAQ: ZNGA  ) is also one of the top developers in the App Store. Mobile gaming accounted for 73% of King Digital Entertainment's (NYSE: KING  ) fourth-quarter revenue as well. However, a company is in trouble when its revenue declines even after the launch of the latest iPhone, and the same happened with King. 

One-hit wonder indeed
King relies heavily on its hit game Candy Crush Saga, as the highly addictive game is responsible for 80% of the company's total revenue. King's recent IPO was valued it at $7.6 billion, higher than Zynga's IPO valuation, and there is no way a one-hit wonder company can justify this price tag. Moreover, the recent sequential revenue drop indicates that the Candy Crush fad is dying and King may be in for a very rough ride.

Source:  King Digital Entertainment F-1

The launch of the iPhone 5s and 5c was supposed to boost King's revenue and bookings. However, as evident from the chart above, that did not happen. King's revenue and bookings fell noticeably in the fourth quarter, which begs the question, did the iPhone launch soften the company's fall? 

According to AppAnnie.com, the daily downloads ranking of Candy Crush has been declining since July 2013. There was a spike in daily downloads in March, which was an outcome of the IPO hype, but other than that, Candy Crush has been falling consistently.

What makes this fall even more alarming is the fact that even the holiday season couldn't put a halt to it. As seen from the image below, last year's holiday season was the best for mobile gaming downloads. Although the apps download growth rate slowed in 2013, it was still higher than any other year.

Source: Flurry.com

Mobile gamers eventually tend to get bored playing a game, and Candy Crush is no exception. The recent dip in revenue clearly indicates that Candy Crush's best days are behind it, and the decline will likely continue. Thus, it's probable that King will struggle in the months to come.

Zynga doesn't look good either
It seems like King's Candy Crush is going down the same road as Zynga's Farmville 2. Although Zynga has managed to beat earnings estimates in the two previous quarters, the company still doesn't have a solution for its biggest problem -- declining active users. Farmville 2, Zynga's most popular game, had nearly 8 million daily active users, or DAUs, in March 2013. However, that figure has fallen significantly and now stands at 4 million.

Zynga's recent high-profile acquisition of NaturalMotion seems like a step in the right direction. The only way Zynga can crawl back to the top is by developing new games, hence the acquisition. Zynga can leverage NaturalMotion's Euphoria game animation engine to develop new games. Euphoria was used to develop many successful games like Grand Theft Auto V and Red Dead Redemption, and if Zynga is able to use this technology to develop blockbuster mobile titles, it can certainly maneuver a turnaround.

However, Zynga has not yet laid out a concrete plan to complete the turnaround. Whether Zynga is able to make the most of the NaturalMotion acquisition is yet to be seen, making Zynga a speculative stock. Zynga's last prestigious acquisition, OMGPOP, ended in a disaster, and the same could happen again. Thus, investors should remain cautious.

With all things considered, Zynga looks like an alluring, albeit slightly risky, investment. So, if you are looking to buy Zynga, be careful about the size of your position.

Bottom line
King Digital is a very risky investment right now. The company's fortunes are dependent on just one game. Comparatively, Zynga is more mature and could be a better bet. Its acquisition of NaturalMotion and adoption of new technology can help it turn around in the future. So, Zynga is a better bet than King.

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