King Is Not Just Another Zynga

In Dec. 2011, Zynga (ZNGA +0.00%) priced its IPO at $10 per share. Later, due to dismal financial results and the declining popularity of its games, its stock price fell well below its issue price and is currently trading below $5 per share.

Some people are of the opinion that recently listed King Digital Entertainment (KING +0.00%) may meet the same fate as Zynga. Such thinking is telling upon the stock price of King, which has fallen over 12% since its listing on March 26, 2014. However, multiple positives differentiate King from Zynga. In fact, there is no major similarity between the companies beyond the fact that both operate in the same industry.

Mobile success
Due to the rapid proliferation of mobile devices in recent years, the mobile game market is the fastest-growing segment of the online video game industry.

Compared to Zynga's games like FarmVille and CityVille, King's games such as Candy Crush Saga and Farm Heroes Saga are much more suited for the mobile game market. Consequently, King is a more established player in the mobile game market than Zynga.

King generated 70% of its revenue through mobile devices in Q4 2013. During the period, its mobile revenue grew over 28 times to $460 million from $16 million in Q4 2012. Conversely, Zynga is still trying to establish itself in the mobile game market through the acquisition of NaturalMotion.

King's success in the mobile game market is the key factor that separates it from Zynga.

Monetization success
Asset monetization is the prime challenge in the global online video game industry. King is addressing the asset monetization challenge twice as effectively as Zynga (see the chart below).

Source: Earnings presentation (Zynga), Form-F1(King)

King is monetizing more than 4% of its user base, while Zynga is monetizing less than 2% of its user base. As a result, King is generating one of the highest margins in the industry. King's net margin for FY 2013 and Q4 2013 stood at 30% and 26%, respectively, compared with Zynga's negative net margin (see the table below).

Revenue diversification
One point that goes in favor of Zynga is its revenue diversification. Zynga's revenue base is much more diversified than King's (see the chart below).

In contrast to Zynga, King lacks revenue diversification. King heavily depends on its top game, Candy Crush Saga, for revenue. In fact, King's over-dependence on Candy Crush Saga, and the game's muted performance during the last two months (see the table below) are prime factors behind concerns related to the company's future growth. However, the recent success of Farm Heroes Saga's mobile version is good enough to address the near-term growth concerns.

The recent success of Farm Heroes Saga's mobile version
King successfully launched the mobile version of Farm Heroes Saga in the first quarter of 2014. Within the first two months of the mobile launch, the average DAUs of the game grew by 150% and average daily games played across all platforms grew by 218% (see the table below).

Moreover, with the launch of Farm Heroes Saga's mobile version, the company has launched mobile versions of all its major games. So, in the future, the company's R&D efforts will be focused on the development/launch of new games.

Final foolish thoughts
Ignoring King on the basis of its peer performance is not a smart idea, particularly when the company is addressing industry challenges and opportunities more effectively than Zynga.

Going forward, King has enough resources in hand, due to improved revenue, high margins, and its recently concluded IPO, to quickly address company-specific concerns (such as lack of revenue diversification) through high R&D spending and acquisitions.

King, which is currently trading at a P/E of about 11, is one of the better picks among its peers.