Mobile Gaming Stock Slumps After Earnings

Shares of mobile gaming stock King Digital Entertainment (NASDAQ: KING) were hit hard in after-hours trading Thursday after disappointing guidance, ending the session down more than 10%.
Fortunately for shareholders, the stock rebounded significantly in pre-market trading Friday. Shares of the company opened around $13.81 per share – down almost 8% from Thursday’s close of $14.99 per share – and the stock has climbed throughout the session.
As of this writing, shares were up slightly for the day.
Shareholders certainly didn’t suffer the huge decline suggested by yesterday’s after-hours trading activity but I don’t think they’re out of the woods yet. The reason the mobile gaming stock sank so much after the company’s first-quarter earnings report isn’t actually because of the earnings figures. Rather, it’s because of the company’s guidance and the lack of a dividend.
This stock is not for the faint of heart.
I took a look at the company before its March 2014 IPO, noting similarities to gaming company Zynga (NASDAQ: ZNGA) that were not at all good. At the time, Zynga was trading at $4.99 per share, well below its IPO price of $10 per share. The only difference is that for investors in the King Digital Entertainment IPO, it didn’t take as long to feel the post-IPO pain.
King Digital Entertainment’s IPO did not go well. The stock fell 16% on its first day of trading. And while the ride has been wild, the bumps haven’t been all bad. The stock dropped 23% on Aug. 13, 2014, rose 20% during the first three days of November 2014, and rose 23% between Feb. 9, 2015, and Feb. 13, 2014.
The stock is now down nearly 15% since the middle of April and remains negative since its IPO, down almost 18%.

Risky Business

Before we look at the details of the company’s earnings report, I want to reiterate the warning I gave prior to King Digital’s IPO. Mobile gaming stocks, like many stocks operating in new markets created by emerging technology, are extremely risky. And they are so risky because their businesses are inherently unstable.
That’s why OMGPop  – maker of the once-popular mobile gaming app Draw Something – lost virtually all of its users shortly after Zynga acquired it for around $200 million. But it’s also why King Digital Entertainment reported profit growth of 7,000% prior to its IPO, thanks to its game Candy Crush.
Mobile game fads are fickle but, when the trend is in your favor, they can certainly be sweet.
Let’s look at the earnings report. King Digital’s revenue and earnings were actually really good. Earnings of 61 cents per share handily beat analyst expectations of 53 cents per share. Revenue was strong as well, beating expectations of $553.8 million by just around $16 million.
But earnings and revenue were not the problem.
First, the company did not announce a “special dividend.” The company paid a special dividend of 47 cents per share in October and doubled it to 94 cents per share in March. This quarter there will be no dividend.
It’s worth noting that, prior to the IPO, the still-private company paid its shareholders a $504 million dividend. Then it raised the money back during its IPO.

Weak Outlook

The most important takeaway from King Digital Entertainment’s earnings report is the weak guidance. One analyst described what he called “material deterioration” of the company’s outlook.
Indeed, the company beat earnings and issued favorable guidance in February, sending the stock up by double-digits. Now we see the same company reporting great earnings with a weak outlook just three months later. But don’t worry, it expects growth to return later.
Is the management team poor at predicting its success? Or is growth slowing down, and the company eliminated the dividend to build cash reserves? Neither one screams “stable.”
Fads come and go. So, too, do mobile gaming fads and so, too, do mobile gaming stock gains. This is not a management team, company or industry I would trust with my money.

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