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Candy Crush Maker King Digital Surges on Positive Comments

Candy Crush maker King Digital Entertainment’s (KING) shares surged 15.13% ($2.70) to close at $20.55 on Jun 30, 2014, following positive comments from a couple of analysts. This was King Digital’s biggest one-day gain since its Initial Public offering (IPO) in March this year.

Per Bloomberg, JPMorgan & Chase analyst Doug Anmuth in a recent note to investors said that King Digital’s strong estimated free cash flow ($800.0 million in fiscal 2014) will enable it to return cash to investors. The analyst also noted that “upcoming game launches will also lead to growth and revenue diversification”.

Another analyst, Michael Pachter, of Wedbush Securities gave positive comments buoyed by strong bookings and profit of flagship game Candy Crush Saga, which accounted for 67.0% of the company’s gross total bookings in the first quarter. Although Candy Crush Saga bookings are expected to decline, the analyst believes that new games will be able to offset it in the near term.

King Digital’s IPO was worst to date in 2014, primarily due to its overdependence on Candy Crush Saga, a free to download game available on Google (GOOGL) and Apple (AAPL) app stores. However, King Digital’s growth prospects improved somewhat after the company reported a better-than-expected first-quarter 2014.

Gross bookings surged 193.0% year over year to $641.0 million. The strong results were driven by higher gross bookings from Farm Heroes Saga following its mobile launch in Jan 2014. The company had 481 million average monthly unique users (MAUs) at the end of first quarter.

With the rapid adoption of smartphones and tablets, we expect the demand for King Digital’s mobile-based games to increase exponentially. The company derives approximately 74.0% of revenues from mobile platforms. The company’s innovative product pipeline is a key positive.

In April, King Digital launched Diamond Digger Saga on Facebook (FB). Most recently, the company launched Bubble Witch Saga 2, which will further boost its top line in 2014. Moreover, gamers’ growing preference for free-to-play games bodes well for King Digital’s future prospects.

However, the strong sales of new consoles from Microsoft and Sony are expected to intensify competition for King Digital in 2014. Moreover, competition from Zynga and other established players with a more visible business model like Electronic, Activision Blizzard and Take-Two Interactive should not be ignored.

Currently, King Digital has a Zacks Rank #3 (Hold).

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