- Investors overreact to King after recent earnings release, $13 a share is a great entry point for going long.
- King has $832 Million in cash and cash equivalents in the bank, near a quarter of its Market Cap.
- Huge upside with upcoming launch through Tencent, the fourth largest Chinese Internet Company.
The recent earnings release by King Digital Entertainment (NYSE: KING) resulted in heartburn on Wall Street as revenue expectations of $606 Million missed and came in at $593 Million. In addition, King fell slightly short on EPS and missed by $.01. While this is certainly disappointing to the investor community, it is not the end of the world the drop in share price would indicate. After all, not only did King have net income of $165 Million for the quarter, the SG&A dropped by $48 Million. This shows that the company is minding its P&L and a good indicator for the future.
KING will surprise their detractors due to the following factors and reward those who enter at the current stock price:
- Partnering with Tencent (OTCPK:TCEHY) opens the door to 500 million mobile gamers in China and even a moderate adoption of Candy Crush Saga, Bubble Witch 2 Saga and other games in the portfolio will be huge bump to the revenue and net income figures.
- Management understands the need to diversify with the acquisition of Nonstop Games for a minor cash hit ($32 Million) to the balance sheet. The performance kicker of $68 Million indicates a belief that there are good things in the pipeline to come and the potential to possibly challenge Clash of Clans with the Heroes of Honor newcomer.
- $832 Million in the bank to make strategic acquisitions for both revenue and development assets. Mobile technology platforms are constantly changing and KING will be able to adapt to these changes easily.
- September dividend payment equates to 3.6% return at the current stock price. Easy premium to take off the table even if it is a one-time event and it still leaves KING with a ton of cash.
- KING's P/E is 6.10 compared to EA's 98.10 and GLU's -26.38
- EA obviously has a considerable portfolio of games but is having trouble transitioning to the mobile gaming market, carries a significant support infrastructure and has more debt than KING or GLUU
- KING's net profit margin is 28.3% compared to EA's 3.16% and GLUU's -10.65
Conclusion: KING came out of the IPO gate with a whimper and went sideways until the latest earnings report hit the stock like "wind sheer." KING is more than a one-hit wonder, has a great balance sheet, made a good strategic acquisition and has a huge upside with Chinese gamers. Grab the dividend premium and go long!