3 Huge Risks for King Digital Investors

Can King Digital avoid the pitfalls suffered by Zynga?

Jun 26, 2014 at 2:30PM

King Digtal (NYSE:KING) skyrocketed to the top of the social gaming ranks thanks to its hit game Candy Crush Saga. The title is famous for its incredible earnings and currently stands as the second highest grossing web and mobile game, just behind Clash of Clans from Supercell

In March of 2014, King Digital made its initial public offering at a share price of $22.50 and a market cap of $7.1 billion. Hours after opening, shares of the company were trading below $20.00. By the end of the day, the company's valuation was $1.1 billion lighter. The debut had similarities to fellow mobile and social games publisher Zynga's (NASDAQ:ZNGA) market bow, and conditions did not improve after King's dramatic IPO. King trades in the $17 range as of this writing and has a market cap of approximately $5.37 billion.

Despite its slump, the mobile games publisher is aiming to expand and recently launched Candy Crush Saga in China through a deal with Tencent. The company also has a relatively attractive price-to-earnings ratio at 8.42. Can King Digital navigate the risks it faces and grow its gaming empire? Does the company's current price make it an attractive investment option?

King could fail to produce a worthy successor to Candy Crush
By far the most visible risk facing King is that it will fail to introduce a new hit property as Candy Crush inevitably begins to wane. Approximately 78% of the company's revenue in 2013 came from its big title. That number dipped to 67% in King's first publicly trade quarter thanks to the emergence of Farm Heroes Saga, but the company has yet to show that it can create a stable of hit games despite claiming access to more than 180 properties.

Many of King's other titles benefit from the Candy Crush Saga association through branding and gameplay similarities. The majority of the publisher's active games feature "saga" in the title, and its most recent high-profile release Candy Crush Soda Saga is more of an aesthetic update than an entirely new game. If King can't create a massive new Saga game to take Crush's place, it will be losing on multiple levels.

Hit replenishment isn't a one time thing—the need to have new replacement products in the pipeline is constant. Even with three hit properties in Zynga Poker, Farmville, Words With Friends, rival publisher Zynga has seen its valuation decline approximately 70% since its 2011 IPO. Without new megahits, King is staring at similar decay.

Candy Crush could melt too quickly
Given the topsy-turvy nature of the social games market, expecting a property to remain evergreen is unreasonable. King Digital was the subject of press mockery for filing to trademark words like "Candy" and "Saga," but the move made sound business sense. The company later withdrew its trademark claim on "candy."

Given the extent to which King is reliant on Candy Crush Saga and the abundance of knockoffs that popular social titles spawn, preserving the appeal of its key title is of obvious importance. That said, the need to file trademarks for common words highlights weakness in King and a problem with the Candy Crush Saga product. The title doesn't have many distinguishing elements in terms of aesthetics or gameplay, and that problem grows by the day.

King still needs Facebook
King Digital has yet to record more than one fiscal quarter on the books, but its business model looks to be in better shape than Zynga's thanks to a heavier mobile presence. Zynga's model is still hugely dependent on browser games, specifically Facebook's portal, with 75% of the company's 2013 revenue coming through Facebook. King fared much better in its last fiscal quarter, with 75% of the company's revenue coming from mobile platforms. Still, that leaves a healthy portion of the publisher's business in the hands of the social networking giant. King's biggest properties have been introduced through Facebook, and the social games maker has yet to outgrow the need for its Internet partner.

Foolish thoughts
King's gross bookings of $641 million in the last quarter, increasing transition toward mobile revenue, and attractive P/E value make it a company worth looking at, but too many substantial risks remain to make it fully advisable at this time. The company's premier titles aren't differentiated enough, and are highly subject to the inherent risks of the social games market. King's model relies on an incredibly small but incredibly valuable pool of spenders, and predicting where they're going to go involves a large element of guess work. If you don't have much tolerance for risk, it's probably best to pass on King.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Keith Noonan 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information