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Analyst Blog

On Aug 20, 2014, Zacks Investment Research downgraded King Digital Entertainment plc ((KING - Snapshot Report)) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The downgrade primarily reflects disappointing second-quarter revenue growth and lackluster full-year 2014 outlook. King Digital reported earnings of 52 cents per share, which managed to beat the Zacks Consensus Estimate of 50 cents. However, revenues of $593.5 million missed the Zacks Consensus Estimate of $618 million in the reported quarter.

We believe that overdependence on Candy Crush Saga for revenue growth remains a major headwind. In the second quarter, the game accounted for about 60% of the gross bookings. The fact that Candy Crush Saga is losing players on a regular basis poses significant risks for King Digital’s earnings potential, going forward.

We believe that King Digital needs to develop other franchises capable of delivering strong growth consistently. However, so far, it has failed to find any replacement, which remains a headwind for the rest of 2014. This prompted management to revise down its full-year guidance.

King Digital now expects gross bookings in the range of $2.25 to $2.35 billion, down from the prior guidance of $2.55 to $2.65 billion. For the third quarter, management expects gross bookings to range between $500 million and $525 million. The company expects bookings to register a sequential decline in the third quarter followed by an increase in the fourth quarter.

We believe that strong sales of packaged games from Electronic Arts (EA - Analyst Report), Activision Blizzard (ATVI - Snapshot Report) and Take-Two Interactive on new consoles from Microsoft and Sony will intensify competition for King Digital in the remainder of 2014.

Moreover, competition from Zynga (ZNGA - Snapshot Report), Glu Mobile and other established players with a more visible business model like EA, Activision Blizzard and Take-Two Interactive cannot be ignored.

Estimate Revisions

The Zacks Consensus Estimate for King Digital’s third-quarter 2014 declined 14% (7 cents) to 43 cents over the last 30 days.

The Zacks Consensus Estimate for 2014 decreased 10.4% (20 cents) to $1.73 per share over the last 30 days. The Zacks Consensus Estimate for 2015 dropped 22% (34 cents) to $1.56 per share over the same period.

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