It's been nearly a year since King Digital (UNKNOWN:KING.DL) began trading on the New York Stock Exchange. The popularity of its hit mobile game Candy Crush Saga propelled the company's financials and fueled its IPO. But how has King Digital fared in the months since?
No shortage of skeptics
While other recent IPOs have doubled or even tripled since their debut, King Digital has largely headed in one direction: down. Although it briefly enjoyed a rally last summer, the stock has mostly been a disappointment, selling off steadily over the last 12 months. Since its first day of trading, King Digital shares are down almost 23%.
King Digital is profitable, but the company has not been able to shake persistent fears that its success is ephemeral -- that the outsized profits earned by Candy Crush Saga are a one-time occurrence, and that unlike other popular video game publishers, King Digital will not be able to sustain its success long term.
In contrast to the mania that often surrounds IPOs, King Digital was widely hated before it even began trading. The New Yorker trashed it just days before its IPO, writing in a piece titled One-Hit Wonders that King Digital's IPO was "likely to end badly," and equating its business with other short-term fads such as Beanie Babies and Cabbage Patch Kids.
All the warning signs were there: King Digital derived almost all of its revenue and profit from just one game, the aforementioned Candy Crush Saga. That game -- despite its popularity -- was just the latest in a growing list of mobile games that saw their appeal skyrocket almost overnight before eventually crashing back to earth (others include Angry Birds, Draw Something, and Words with Friends).
Some signs of life
But King Digital has shown some signs of improvement over the last 12 months, and though the share price doesn't seem to reflect it, its business is more attractive today than when it first went public.
Last month, King Digital reported a quarter that was better than analysts had anticipated. In the fourth quarter, King Digital earned $0.57 per share -- analysts had only been expecting a figure of $0.47. In addition, although Candy Crush Saga still generates the bulk of King Digital's business, it is beginning to diversify: Games other than Candy Crush Saga generated more than half (55%) of King Digital's total gross bookings. In the fourth quarter, King Digital's titles represented three of the top 10 grossing games on the iTunes app store, and four of the top 10 grossing games on Google Play.
Its business model remains unproven
But it's not surprising that King Digital continues to trade with a relatively anemic, single-digit price-to-earnings ratio. Compared to traditional console games, the mobile app store model is still unproven and prone to fads. As I write this, Trivia Crack -- a game that was virtually unheard of just six months ago -- is the sixth-most popular free app on the iTunes app store.
At the same time, though King Digital can boast of several distinct games, many of them are remarkably similar in terms of core gameplay. Candy Crush Soda Saga, for example, is distinct from Candy Crush Saga, but it maintains the same basic structure. If players tire of the increasingly typical "match-three" style, they may defect from both Candy Crush Saga and Candy Crush Soda Saga.
King Digital appears to be a better investment today than it was 12 months ago. Its business is more diversified, and its stock is less expensive. But if you were skeptical of King Digital's business model last March, you're probably still skeptical today.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.