Does It Make Sense To Buy King Digital?

King Digital, the mobile game maker whose flagship Candy Crush Saga series launched it into the New York Stock Exchange - with a disappointing IPO, recently announced that Activision Blizzard, a giant in the video game industry, would acquire it. With franchises like Call of Duty and World of Warcraft, Activision has almost no mobile presence. This made it almost a no-brainer for the company to buy out King Digital at $18 a share.

Upon the news, King’s stock spiked to around the same price range as the buyout price. Since then it’s hung in limbo in the $17.80 to $17.90 range. Of course, with moves still ongoing to finalize the deal, King Digital is still on the move. After all, there’s still the possibility that the merger may not go through.

The company recently launched the latest in its Candy Crush franchise, Candy Crush Jelly Saga. Simply another variation of the hit casual puzzle game, much like its predecessor, Candy Crush Soda Saga, so far it’s received a pretty warm reception from players.

Analysts have also seen good things come from King Digital lately, enough to get an average recommendation of “hold” from sixteen analysts, with an average 12-month target price $19.35. Now, obviously, that price isn’t going to happen unless the merger goes through. There’s no point in anyone purchasing the stock above its current level when a buyout is going to come in lower than what they bought it for.

So why might you buy King Digital at this point? There isn’t really a reason to. However, as the months following the announcement go on, it’s possible that shareholders who were initially excited about the buyout will simply take their money and move on, potentially pushing the price of the stock down. As the price goes down, there is an opportunity to take advantage of the dip, knowing that when the buyout closes, you’ll get your $18 a share, an almost guaranteed return.

That dip could also come because investors lose faith in the deal. Not every merger goes through, so there is the potential that the deal won’t close for one reason or another. It could be that the two parties couldn’t agree on the final terms, or another alternative presents itself to Activision and it chooses to move on. In this case, there is downside risk to the deal not going through, even with an average price target above the deal price.

That’s because Wall Street hasn’t been very kind to King, or any other mobile game maker for that matter. King Digital has been called a one-trick pony for its inability to produce another Candy Crush-like success. And if it continues to be incapable of doing so, a cancellation to the merger could hurt the stock.

So unless you have some insider information that shows that a) the merger isn’t going through and b) King Digital has an ace up its sleeve, it seems that the stock has more downside than upside risk at its current price level.

Disclosure: None.

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Jonathan Garfield 8 years ago Member's comment

With mobile games you need to throw games against the wall to see what sticks. $KING reported profit of $567.6 million last year.Revenue jumped to $1.88 billion from $164.4 million. They have all the money in the world to come up with new games. They won't be a one trick pony for long.

Samantha Goldman 8 years ago Member's comment

While it's possible, it's certainly not guaranteed. There have been countless one hit wonders. Which makes this investment rather risky.

Alpha Stockman 8 years ago Member's comment

This sums it all up: "There’s no point in anyone purchasing the stock above its current level when a buyout is going to come in lower than what they bought it for."

Barry Hochhauser 8 years ago Member's comment

I agree with @[Bruce Powers](user:4757), that depends on how well their next games do.

Mike Nolan 8 years ago Member's comment

This is a smart move for Blizzard. They have great platform games, but the future lies with mobile. King and Blizzard will prove to be a formidable pairing which will be greater than the sum of it's parts. I think the future will be very bright for this stock indeed.

Corey Gaber 8 years ago Member's comment

I believe you've hit the nail on the head on this one. I believe your prediction will prove 100% accurate.

Bruce Powers 8 years ago Member's comment

I'm not so sure. You are forgetting one key point. $KING is not a one hit wonder. Sure, the stock may stagnate or even go down for a bit. But once they have their next hit again, the price will increase even further.