Shares of Candy Crush owner King Digital Entertainment (KING) have jumped more than 35% over the past two weeks, topping the IPO price for the first time, as optimism builds that the company is more than just a one-hit wonder.
King has been the subject of an epic debate among investors. Some argue that King’s March 26 initial offering at $22.50 a share was a bubble-inflated price for a company with one mega-hit that was already fading. They held the upper hand initially, as King shares opened $2 below the IPO price on the first day of trading and slumped for months, not regaining the offer price until July 2. Others say King has developed a successful strategy for sustainable, long-term mobile gaming profits.
Full disclosure: optimistic investors include this reporter.
Lately, the optimism is catching on. In the third quarter, King is expected to roll out Candy Crush Saga in China, in partnership with Tencent, and a spinoff game, called Candy Crush Soda Saga, worldwide. And hand-wringing over King’s dependence on Candy Crush is waning as the company’s other games such as Farm Heroes Saga and Pet Rescue demonstrate strong popularity in the app store rankings for Apple (AAPL) and Google (GOOGL), Piper Jaffray analyst Michael Olson noted in a report on Monday. King averaged 3.1 games in the top 20 rankings and 5.3 games in the top 200 during the second quarter, Olson said. That was up from averaging 2.9 and 4.9 games during the first quarter.
Higher price targets
Olson upgraded King to “overweight” and raised his price target on the stock to $28 from $19. The move followed several other analysts who upgraded their views on King last week. Investors have been valuing King at modest levels which assume revenue and profits will decline significantly over the next year, Michael Pachter, an analyst at Wedbush Securities, noted in a June 25 report that was ahead of the pack in highlighting the company’s strengths. But Pachter expects revenue will remain stable in the second and third quarter, and grow in the fourth.
By then, "we expect meaningful contribution from Candy Crush Soda Saga, a brand extension of Candy Crush Saga that is sufficiently different from the first game to be considered a separate game, but sufficiently similar to draw the interest of the vast Candy Crush audience,” he wrote.
King shares were trading at $21.71 midday on Monday after hitting a high of $23.27 in the morning. That was up from the recent low of $16.83 on June 24. The shares hit an all-time low of $15.26 in May.
Part of the recent jump is likely due to short sellers closing out their bets against the stock. As of mid-June, investors had sold 10.5 million shares of King short, 13 times the stock’s average daily volume and about 17% of the shares available for trade by the public.
After I bought at about $18.50, the shares kept right on sinking, losing another few dollars. But I didn’t expect a quick turn around — it takes time for the story to play out as I expected, or not — in the company’s results.
But investors won’t have much more official data to analyze until King reports its second-quarter results, expected in early August. Analysts expect King to report $608 million of revenue, comparable to the first quarter’s $607 million, with earnings per share of 59 cents, just below first quarter EPS of 61 cents.
But the far, more important numbers will be around usage of King’s various games. The company had 352 million unique monthly users in the first quarter, which included 11.9 million users who paid to play an average of $18.02 each. Even subtle changes in the number of paying users or the amount they spend on average could send the stock reeling up or down.
Another key data point helps reveal how successfully King is diversifying away from Candy Crush. The hit game provided 67% of gross booking in the first quarter, down from 78% in the prior quarter, but other games picked up the slack and overall bookings increased 1%. Bookings includes the actual amount players spend on King games before sales tax and other items are deducted.