King Digital Is No Zynga

The Candy Crush Saga company crushes its first quarter as a public company.

May 7, 2014 at 2:30PM

Even monster growth isn't enough to please a skeptical market. King Digital Entertainment (NYSE:KING) posted robust growth in its first quarter as a public company. Gross bookings soared 193%, to $641.1 million, in its first quarter on continuing strength of its Candy Crush Saga game that keeps addicting mobile players. Adjusted earnings roughly tripled to $0.61 a share.

It wasn't enough to please Wall Street. When King went public less than two months ago at $22.50, the biggest concern was that it was a one-trick pony. Would it have enough ammo after the inevitable fade of its marquee game where players navigate through hundreds of levels to create candy-crushing patterns?

It was a legitimate worry. Candy Crush Saga had attractive 93 million daily active users in December, generating  an average of 1.085 billion game plays a day. King's second most-popular game was attracting just 15 million daily active players, going through an average of 129 million daily sessions.

There's good news and bad news on that front. The good news is that King isn't relying on smartphone-toting candy smashers the way it was before. It bragged about having three of the 10 highest-grossing games across all of the major platforms (iTunes and Google Play domestically, and Facebook worldwide). Candy Crush Saga went from being 78% of King's total gross bookings during last year's holiday quarter to just 67% of the tally this time around. That comes as a welcome relief -- until you're hit with the zinger: Gross bookings inched just 1% higher sequentially. You don't need to be a math whiz to figure out the problem. Candy Crush Saga generated less money for King during this year's first quarter than it did during last year's fourth quarter.  

This is a problem that's compounded because there were already fears that the game was peaking two quarters ago. Quarterly revenue, gross bookings, profit, adjusted EBITDA, and monthly unique payers all moved lower from the third quarter of last year to the fourth quarter. 

Instead of applauding King's ability to diversify -- growing its gross bookings sequentially -- the market is playing the Zynga (NASDAQ:ZNGA) card. There's no denying that Zynga's dark shadow played a part in King being a broken IPO. Zynga went public at a whopping $7 billion market cap, going on to shed nearly two-thirds of its value after its fundamentals peaked in 2012. 

King is in a much better place than Zynga. It hit the market at a more reasonable valuation than Zynga, and it's generating more revenue and far greater profitability than Zynga ever did. The market has every right to ask what King will do for a second act now that Candy Crush Saga has scored back-to-back quarters of sequential declines, but the answer lies in King's ability to grow its overall business this time around. King isn't perfect, but it's certainly not broken. There's an opportunity here to grab King at a price well below what institutional investors were willing to pay in late March. The game's not over, even if today's sell-off may make it seem as if King is losing.

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