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Why Shares of King Digital Entertainment PLC Slumped in August

By Timothy Green - Sep 3, 2015 at 1:00PM

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Revenue and profits continued to decline for the free-to-play game company, with new games unable to make up for the decline of its biggest hit.

What: Shares of King Digital (KING.DL), the company behind the popular mobile game Candy Crush Saga, sank 14.2% in August, according to S&P Capital IQ data. While the company managed to beat analyst estimates when it reported earnings, gross bookings, monthly unique users, and profits all declined.

So what: While King produced results that were better than analysts expected for the second quarter, the trends facing the company are mostly negative. Revenue declined by 17.5% year over year, gross bookings slumped 13.4%, and net income dropped 27.9%. While monthly active users rose slightly, monthly unique users declined, and monthly unique paying users, which the company depends on given its free-to-play business model, decreased by 27%.

King has been churning out new games as its mature games decline, but the effort hasn't been enough to prevent its revenue and profits from slumping. Candy Crush Saga still accounted for nearly 40% of the company's gross bookings during the quarter, and while non-Candy Crush Saga bookings rose 30% year over year, these games didn't come close to fully offsetting the decline of King's biggest game.

Going forward, King expects gross bookings between $460 million and $485 million during both the third quarter and the fourth quarter. King produced gross bookings of $544 million during the third quarter of 2014 and $586 million during the fourth quarter of 2014.

Now what: At some point, the growth of King's other games will be enough to counteract the decline of Candy Crush Saga. That hasn't happened yet, and King expects bookings to continue to fall through the rest of this year. Dependence on Candy Crush Saga was the biggest concern when King went public last year, and investors appear to be losing their patience with the company. King still produces plenty of profits, but the sustainability of those profits is an open question.

Investors are betting that profits will continue to decline. The stock now trades at a bit more than seven times last year's earnings, a price that would be a bargain if its profits were sustainable. With the trends showing no signs of improvement during the second quarter, King's stock could still have much further to fall.

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