Is King Digital More Like Zynga or Activision Blizzard?

King Digital Entertainment  (NYSE: KING  ) shares have soared in the last couple weeks behind bullish upgrades and the realization that it might not be a one-trick pony like Zynga (NASDAQ: ZNGA  ) . While investors are warming up to King, the question remains whether it can become the next Activision Blizzard  (NASDAQ: ATVI  )

The next Zynga?  
King Digital is the developer of the billion-dollar title Candy Crush Saga. In 2013, King reported revenue of nearly $2 billion, with net profit of $567 million. Its nearly 11-fold revenue increase from the previous year was unlike the type of growth investors typically see in a billion-dollar business.

However, prior to its IPO, King's F-1 filing produced a dark cloud over its seemingly remarkable growth. For one, Candy Crush accounted for 80% of the company's total bookings. In the quarter prior to its IPO, King saw total bookings and monthly unique players fall 3% and 7%, respectively, quarter over quarter.

As a result, investors labeled King the next Zynga, a company that traded with a valuation north of $11 billion in 2012 following the success of FarmVille, but is now down to $3 billion. That fall came from rapidly declining revenue and users for FarmVille.

Quickly diversifying for longevity
With that said, research firms like Piper Jaffray are not as concerned with Candy Crush in King's upcoming quarter, but rather the performance of other titles. King Digital's first-quarter report, issued earlier this year, proved that the company is not a one-game business.

In that quarter just 67% of its $641million in total gross bookings, $607 million in revenue, came from Candy Crush. The company had two other games in the top 10 by gross on both iOS and Android. King Digital still relies on Candy Crush for the bulk of its fundamental performance, but that dependence has lessened from 80%, to 78%, and now 67% of total bookings over the last three quarters.

Looks like Activision
King Digital remains a company with near-unprecedented growth whose main title is still performing well while other games provide diversity. It's trading at just 10 times earnings, which significantly lags Activision Blizzard's 25.5 times multiple.

Activision is approximately twice the size of King on a revenue basis, and is widely considered to be diversified and without the risks that are attached to King. However, even Activision's fundamental performance is driven by certain blockbuster titles, including the Call of Duty and Skylanders franchises. Moreover, Activision's 100% stock gain since 2013 has been tied to the outlook and high expectations for a third-billion dollar game, Destiny. Overall, this is not so different from King's operational status, making much of the criticism of that company look foolish.

Foolish final thoughts
King Digital is quickly answering questions about its reliance on just one game, and while Candy Crush accounts for the majority of its revenue, the continued drop in that share level to 67% should calm some fears of King becoming the next Zynga. King's operations may revolve around mobile, but in many ways it looks more like Activision than Zynga, having shown the ability to produce several popular games at a time, including titles that can be turned into franchises. King Digital might yet become an Activision Blizzard-like company.

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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.

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