King Digital’s Earnings Proved 1 Thing

King Digital (NYSE: KING  ) priced at the low end of its IPO range, fell on its first-day of trading, and has since trended lower. The reason is that investors are terrified of it becoming the next Zynga (NASDAQ: ZNGA  ) . However, in its first quarter since becoming a public company, it not only has proven is that it's not Zynga -- it might even be a better investment than traditional gaming powers like Activision Blizzard (NASDAQ: ATVI  ) .

Let's think back
In 2011, Zynga made its public market debut with the success of one game, Farmville, driving nearly all of the company's bookings. Now, two and a half years later, Zynga has lost more than 60% of its IPO value, and during its last quarter, it saw revenue decline 36%.

In 2012, Zynga had annual revenue of $1.28 billion. Over the last 12 months, revenue has fallen to $777 million, with the cause of this decline being the fall of Farmville, and the company's inability to capitalize with another blockbuster game.

Investors are frightened that the same fate will befall King. Specifically, investors were concerned that the company's total gross bookings declined from $648 million to $632 million between the third and fourth quarters of 2013. However, those fears are proving to be overblown.

What did King tell us?
In King's most recent quarter, its bookings rose to $641.1 million, showing an improvement over the fourth quarter, and proving that King's bookings are not in a Zynga-like fall. Moreover, both bookings and monthly active users rose three-fold year over year, with the latter growing 15% over the December quarter.

However, in what may be the most important metric of all, Candy Crush accounted for just 67% of the company's total bookings, which is significantly lower than its 78% share in the fourth quarter. This decline of market share, coupled with marginal growth relative to the fourth quarter, might signal that Candy Crush is slowly losing momentum, but that King is not.

King told us -- and proved -- that it's not a one-game company.

A multi-game strategy that creates value
Of course, King has the Candy Crush Saga, which has remained atop the list of top-grossing games for iOS and Android, but other games like Farm Heroes Saga and Pet Rescue Saga also place in the top 10. Not to mention, Papa Pear and Bubble Witch also have millions of daily active users each. King is a multi-game company, and unlike Zynga, is not a one-hit wonder.

For more evidence, investors can look to traditional gaming company Activision Blizzard. This is a company that recently announced earnings, has traded higher by 18% this year, and is guiding for revenue of $4.67 billion this year.

Actvision has a large portfolio of games offered on game consoles, smartphones, and PCs. Yet, despite its diversity, Actvision is solely driven by two blockbuster franchises, Call of Duty and Skylanders. Much of its gains in the last year have been due to the excitement and expectations for its game Destiny, which many believe could become its third billion-dollar franchise. The point is that even large, long-lasting gaming companies rely on certain franchises for success, and for King to be a young company, it's doing a great job at creating diversity.

Final thoughts
King's current market cap of just $5.3 billion means that the stock is trading at just 8.3 times earnings. In comparison, 8.3 times earnings is a near 50% discount to the S&P 500 and just one-third the premium of Actvision Blizzard.

While Zynga is not profitable, if we compare it to King on a revenue basis, Zynga's price/sales ratio of four is nearly twice that of King. Therefore, King has low expectations built into its stock, yet the company has given us no reason to doubt its future.

King is worth the risk. With Candy Crush remaining a top-grossing game and other titles rising up the charts, this is a stock that could trade considerably higher both short- and long-term, as the company continues to prove that it's not the next Zynga.

Not a game, your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2953375, ~/Articles/ArticleHandler.aspx, 8/28/2015 1:22:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated Moments ago Sponsored by:
DOW 16,614.91 -39.86 -0.24%
S&P 500 1,984.69 -2.97 -0.15%
NASD 4,815.62 2.91 0.06%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 1:04 PM
KING $13.47 Up +0.06 +0.45%
King Digital CAPS Rating: *
ZNGA $2.51 Up +0.09 +3.72%
ATVI $29.59 Up +1.66 +5.94%
Activision Blizzar… CAPS Rating: *****