"Candy Crush" maker King Digital Entertainment (KING, Financial) got a major certificate of upgrade from JP Morgan (JPM, Financial), as it was given the "Overweight" rating and the target stock price was readjusted to $20. These developments come after the financial services firm mentioned that there would be significant growth opportunities, which would present a strong outlook based on the "Candy" franchise of games King’s Digital makes and the upcoming series expected to be released during the course of 2015. The effect of this information immediately pushed up the stock price by 3.89% and was seen rallying at around $15.48 a share. Analyst Doug Anmuth, who watches over the stock closely, estimated that the EPS from 2015 would be $2.03, which is higher than his previous estimate of $1.99. Doug feels that the extensive network that King’s Digital Entertainment has with the Candy Crush Saga franchise, and also the fact that Candy Crush Soda Saga has picked up a good start, will actually push the stock up to the estimated levels even though the prices have initially fallen by 1.15% in the start of the year.
Some significant numbers
Other notable numbers include the recent trading volume of the King’s Digital Entertainment which stood at 579,880 shares, with the 1-year high price of $23.48 a share. The current 50-day moving average is $14, and the 200-day moving average is $14.01. The market capital stands at $4.72 billion, and ratio for price-to-earnings is 8.34.
What is generating the excitement?
According to the data released in February, when the last quarterly earnings were revealed, almost all estimates were beaten by the company. The EPS for the quarter was $0.57, beating the estimated $0.47 by a margin of $0.10. The revenue for the quarter was $545.60 million, which also beat the estimate of $519.23 million, though the comparison with last year revealed a dip of 9.3% from the same quarter last year. However the expectations are high as:
- King Digital Entertainment has a monthly unique user (MUU) base of 356 million. This gives them a significant cost advantage in terms of user acquisition, and helps them provide real-time game play data. This network happens to be larger than LinkedIn Corp (LNKD, Financial) and Twitter (TWTR, Financial).
- The CCS has been holding on strong, to the user base for King’s Digital Entertainment, even though CCSS has made a strong and decisive start. It is estimated that by 4Q of FY2015, the game itself will become the largest one for the company with a value of $165 million.
- King’s Digital Entertainment will be launching around 5 new games in 2015; 1 to come up in the second quarter and the rest in the second half of 2015.
- Though Candy Crush Saga contributes 55% of the company’s earnings, there are some other games which the company could capitalize on, such as Bubble Witch Saga, Pet Rescue Saga, Papa Pear Saga and Farm Heroes Saga, which, too, can expand, but matching the popularity of CCS will still be tough.
Competitor position
Gaming was also made popular on the internet by another company, Zynga Inc. (ZNGA, Financial). But they are still considerably behind King’s Digital. With signs of revenue stabilization and close to book-value valuation, analysts are now having bullish to neutral views on the stock. In a recent closing, Zynga closed 0.77% downwards, while the year-to-date closing has been down by over 5%, but the analysts are still optimistic as the non-GAAP numbers have shown breakeven targets getting achieved. The launch of social casino games, such as the newly launched "Hit it rich! Free Casino Slots" is an area in which the company had been strong in the past and could hold the key to its future growth. The industry figures show that 11% of the revenue from mobile gaming last year has been from the social casino scene, and is expected to grow to a size of $3.3 billion by this year-end. After acquiring Spooky Cool Labs in 2013, there is always a window open in the UK where hard money gambling regulations are still more relaxed than other parts of the world, which in turn would revive the company yet again.
Final thoughts
King’s Digital Entertainment is currently sitting on a very advantageous position, with higher than expected results being delivered on a regular basis. Also, the rest of 2015 will be very crucial for new games such as CCSS, which is expected to be the top earner for the company by the end of the year. However, there is also a huge potential to grow the lesser known titles such as Bubble Witch Saga, Pet Rescue Saga, Papa Pear Saga, and Farm Heroes Saga. They might not be the star performers, but can become prime revenue support base, if the gaming giant continues to offer development and innovation to its loyal user base.
