3 Reasons King Digital Stock Is a Buy
King Digital's stock has been one of the worst performing IPOs of the last year, down 42% in the last three months alone. The gaming company found success with Candy Crush Saga, but the reality of softer bookings growth from the game combined with the catastrophic history of peer Zynga has created a foolish amount of pessimism surrounding the company, and its stock. However, three reasons in particular make King Digital a buying opportunity, a stock that's poised to trade higher.
King Digital is simply cheap
In looking at King Digital purely from the perspective of a stock, it's insanely cheap at just 6.7 times next year's expected earnings. Notably, analysts expect revenue to decline more than 3% in 2015 versus 2014. Analysts also estimate that King's EPS will fall from $2.13 to $1.86 during the same period.
That said, even with expected losses year-over-year, stemming from the usage declines of Candy Crush, King Digital is still very cheap. Furthermore, King Digital has an operating margin well over 35%, far superior to Zynga's negative 18% operating margin. King's strong profitability combined with its recent IPO, has created a cash position in excess of $830 million, about 20% of its market capitalization. Therefore, King Digital trades at just 4.6 times trailing 12-month earnings minus cash, which is cheap by any standard.
King is more than Candy Crush
In looking back, what ultimately crippled Zynga was its inability to move beyond and create another blockbuster that lived up to Farmville. Zynga competitor Rovio has had similar problems in replicating the performance of Angry Birds, which thereby led Rovio to recently announce job cuts of up to 130 positions.
Therefore, it's no surprise investors have similar concerns with King Digital following the struggles of its peers. However, King differs because it has already proven its ability to produce top games beyond Candy Crush.
Specifically, King Digital has had two additional games, Bubble Witch Saga and Farm Heroes Saga, during the last year that were, or are currently top grossing games on both Google Play and iOS. During the second quarter, King's total bookings excluding Candy Crush rose to $250 million from $211 million in the first quarter, a double-digit increase.
That means Candy Crush accounted for just 59% of total bookings in the second quarter, down from 67% in the first quarter. This also shows significant improvements over 2013, where Candy Crush's percentage of total bookings topped 80% for King Digital. This essentially proves that fears of a one-hit wonder are unwarranted, and while King may never replicate Candy Crush's success with a single title, it has a portfolio of games that can carry its weight.
King's opportunity for app expansionWith all things considered, King Digital is a cheap stock that has had success with multiple games, unlike Zynga and even Rovio. Diamond Digger Saga is the company's newest title, launching in September, and already has between five and 10 million installs on Google Play with an average rating of 4.2 stars out of 5.
In total, King has just 36 total applications, which might seem like a lot, but hardly compares to Disney, Electronic Arts, Glu Mobile, and Softbank, who have 577, 929, 243, and 1,588 applications, respectively, as of the end of August. Therefore, because King doesn't have 100s of applications, investors might think that it ranks significantly behind developers that have more applications in revenue. However, according to App Annie, King Digital was the number two top grossing application publisher on iOS and Google Play combined at the end of August. This puts King ahead of top developers like Electronic Arts, Disney, and Tencent, all of which have far more applications than King Digital.
In other words, King Digital is creating more revenue with fewer titles than competing game and application developers. This bodes well for the company's future, because if King Digital can be the second highest grossing app developer with under 40 applications, then how successful could it be with nearly 1,000 apps, like Electronic Arts? It's a valid question, one that seems to weigh in the favor of King in the long term, especially given the fact that it has already produced three top games out of 36 total, and possibly another top app in the making with Diamond Digger Saga.
All things considered, investors should quit playing games with King Digital; this is a company with a diversified portfolio of successful games that's much more similar to the $11 billion Electronic Arts' portfolio than Zynga's one-hit wonder. While mobile gaming as an industry is volatile historically, King's multi-game success, and upside potential in increasing total applications long-term presents a great investment opportunity, with a stock priced far cheaper than it deserves.
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The article 3 Reasons King Digital Stock Is a Buy originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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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