What King Digital Needs

For a while there, King Digital was the darling of Wall Street analysts. After suffering from undeserved high short interest, the company finally got some respect in February of this year after it crushed Q4 revenues and earnings.

Leading up to Q1 2015 earnings, analysts were upgrading King shares and raising its target price. But all of that came crashing down when its May report included weak guidance for the next quarter. Management blamed the anemic outlook on seasonality, forecasting that it would return to growth trends toward the end of the year.

The real problem

What’s really hurting King Digital, though, isn’t an issue of seasonality. It’s a lack of diversification.

For example, non-Candy Crush Saga titles generated $324 million, or 55% of the total gross bookings, during Q4 2014. In Q1 2015, bookings increased to $375 million and 62% respectively — a 15.74% increase in bookings. But those numbers also include Candy Crush Soda Saga, which was released in November 2014. If the company can manage only a 15.74% increase after launching a new game, there’s a problem.

The solution? Take a page from competitor’s playbooks and make more games. You see, the problem with King is that only has 11 games available for download on major app stores — including AlphaBetty Saga, the company’s first word-based casual game, which was released Wednesday. Compare that with Glu Mobile, which has some 55 titles and Zynga, which has 17 current mobile titles, but has also discontinued countless other mobile games over the year.

To be fair

King Digital has been making strides to combat the threat of its so-called one-hit-wonder status. The company acquired Singapore-based strategy game maker Nonstop Games in August 2014 and then Seattle-based strategy game maker Z2Live in February 2015.

King has soft-launched its first non-casual game Paradise Bay, which allows players to create a tropical island and trade with other players. The game will become available on app stores during the second half of the year. So it really looks like the company is proceeding with its strategy, which was to use Candy Crush Saga to establish baseline revenue so they could ramp up on creating new games.

Do investors have the patience?

If King Digital wants to stay in Wall Street’s good grace, it needs to ramp up much faster than it currently is. Adding a new game a few times a year isn’t going to be enough to combat the waning interest in older games — barring the company is able to hit it big again like it did with Candy Crush, but that’s highly unlikely.

In the meantime, investors may not be willing to wait for King to find a way to stop the bleeding. The stock price has yet to recover from the 15% drop after May’s earning release and it may not do so for a while if the company is unable to churn out games at a faster clip to generate more revenue.