Why King Digital Entertainment is a Good Short
Mobile game maker King Digital Entertainment (KING) went public in March 2014 and its IPO was valued at $22.50. Back then, I recommended investors to stay away from King’s IPO and its share price has fallen almost 40% since then. Given the boom in mobile gaming industry, bargain hunters may be looking at King Digital for a speculative investment. However, I think the stock is not a good fit for long-term investors and is still a short at present valuations.
Despite falling considerably since going public, King Digital still has a market cap of over $4.5 billion.
King bulls argue that the company is nicely positioned to benefit from the boom in mobile gaming industry. According to reports, the mobile gaming industry in estimated to grow to $45 billion in valuation by 2018. There’s no denying the fact that mobile gaming industry is growing as a whole. However, the industry is very fragmented with minimal entry barrier, making it difficult for market leaders to generate high revenue and profits consistently.
Companies like Zynga (ZNGA) and Glu Mobile (GLUU) have failed to grow their valuation over the years due to the fact that it is impossible for any single company to consistently deliver chart-topping games. Both Zynga and Glu only have a handful of franchises that have generated considerable income for the companies. Similarly, King Digital has also generated majority of its revenue from Candy Crush Saga and with the game losing popularity over the years, King has struggled to sustain its revenue stream. In the history of mobile gaming, no company has been able to deliver chart-topping games consistently.
Given the limitations of mobile gaming, i.e., small screen size, difficult maneuvering, etc., no one can accurately predict which games will go viral and which won’t. Moreover, given that anyone in the world can design a game with a few months of training, the whole mobile gaming industry is fragmented. With millions of app designers around the world, I don’t think any single company will be able to dominate that mobile gaming industry. And it is for this reason that once-famous companies like Zynga and Glu Mobile have lost considerable value over the last few years.
Among the publicly listed mobile gaming companies, King Digital currently commands the highest market cap. Although King is generating more revenue that others, the company will struggle once the popularity of its famous franchises fades away completely. Thus, the chances of King Digital sustain its $4.5+ billion market cap over the long-run is next to zero. King’s trailing P/E is 8.25 as compared to forward P/E of 8.75. This indicates that analysts are expecting King’s earnings to decline slowly. So bearing in mind King’s long-term prospects, I think the stock is a short.