Why King Digital Stock Got (Candy) Crushed Today

Is King Digital's plunge meaningful? Or just another movement?

Aug 13, 2014 at 3:20PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of King Digital Entertainment PLC (NYSE:KING) plunged by as much as 25% in Wednesday's trading after the free-to-play game specialist -- best known for its "Candy Crush Saga" titles -- announced weaker-than-expected quarterly revenue and disappointing forward guidance.

So what: Adjusted second quarter revenue rose 28.7% year over year to $593.5 million, which translated to adjusted earnings of $0.59 per share. Analysts, on average, were looking for the same earnings of $0.59 per share on higher sales of $605.7 million. Meanwhile, King Digital's second-quarter gross bookings -- the company's key measure for in-game virtual goods purchases -- rose 27% year over year to $611.1 million. However, that also represented a 5% sequential drop from last quarter, and fell short of analysts' expectations for bookings of $640 million.

Worse yet, King expects third-quarter bookings to post another sequential drop to a range of $500 million-$525 million, and reduced its full-year bookings guidance to a range of $2.25 billion-$2.35 billion.

To its credit, King also attempted to take some of the sting away for patient investors by announcing a one-time special dividend of $150 million, or $0.469 per share, payable to shareholders of record on Sept. 30, 2014.

Now what: To explain the shortfall, King Digital pointed primarily to lower "Candy Crush Saga" bookings, which represented a full 59% of total second quarter gross bookings. On the positive side, that's down from 67% of total bookings last quarter, as growth from newly launched titles like "Heroes Saga" and "Bubble Witch 2 Saga" helped diversify King Digital's base. What's more, King announced plans to expand outside the casual gaming space with the acquisition of "Heroes of Honor" creator Nonstop Games for a total consideration of $90 million.

But Nonstop Games isn't expected to launch significant new titles until 2015, and King's own 2014 guidance shows its existing repertoire still can't completely offset the company's outsized reliance on "Candy Crush." For now, that's why I'm still perfectly content watching King Digital stock from the sidelines.

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Steve Symington owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

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