Analyst: King Digital Entertainment Continues Riding Candy Crush Wave

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.  

We are initiating coverage of King Digital Entertainment (NYSE:KING) with an OUTPERFORM rating and a 12-month price target of $25. Our target is based upon assigning a roughly 9x multiple to our $2.87 estimate for King’s EPS in 2015. This reflects a discount to the market multiple to account for the risks associated with a hit-driven business, and to reflect King’s large concentration of revenues from its biggest game, Candy Crush Saga.

King has enjoyed remarkable growth in the past two years, driven by several game launches on a number of platforms. The majority of these Saga launches occurred in 2013 and 2012, with the most lucrative by far being Candy Crush Saga for mobile devices in Q4:12.

As the popularity of its games has increased, King has been able to effectively monetize its properties, with revenue growing to almost $1.9 billion in 2013 from $164 million in 2012 and $64 million in 2011. According to App Annie, King has three of the top 10 grossing apps in both the Apple App Store and the Google Play Store as of the time of writing.

A large portion of the company’s financial performance is tied to the success of one game, Candy Crush Saga. King’s top three games accounted for 94 percent of its gross bookings in 2013, up from 61 percent in 2012. In Q4:13, that figure was 95 percent, with Candy Crush Saga alone accounting for 78 percent.

King’s bookings mix by game reflects the outsized popularity of Candy Crush Saga, which had 93 million average DAUs and 1,085 million average daily game plays in December 2013. Going forward, the company expects Candy Crush Saga to account for a smaller percentage of mobile gross bookings as it diversifies its portfolio of mobile games.

We expect revenue and bookings to return to positive sequential growth in 1H:14 after declining at the end of 2013. King’s Q4:13 bookings were down sequentially due to a decrease for Candy Crush Saga, and the company will not report Q1:14 results until later this week. In its prospectus dated March 25, management disclosed that “recent launches, in combination with new content releases, have contributed to recent gross bookings consistent with those of the fourth quarter of 2013.”

We do not believe management would have made its Q1:14 bookings prediction had it not been confident about the performances of its games as of the last week of the quarter. It is in management’s best interests to set expectations low for Q1, only to exceed them in its first quarterly report.

Michael Pachter is an analyst at Wedbush Securities. 

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