King Digital Is One Of The Market's Cheapest Stocks, But Is It A Buy?

While the official Magic Formula screens and our own screener don't always agree, they do agree on the stock I want to highlight today, King Digital (KING).

There can be no dispute that KING is one extraordinarily cheap stock. It is also difficult to dispute that, at least over the past 3-4 years, KING has been a remarkably well-run company.

That said, there are some risks that give pause and help explain the stock's low valuation. Let's take a look at this interesting opportunity.

A Sweet Business

As I'm sure many readers already know, King Digital is one of the largest new-age game companies focusing solely on casual games for mobile phones (Apple's iOS and Google's Android) and, to a lesser extent, Facebook and the web. King's games are designed as free-to-play, with monetization coming in the form of in-game currency and items, add-on content, and some in-game advertising.

King has four ongoing game franchises:

Candy Crush

Candy Crush Saga: this franchise of "match 3" puzzle games consists of the enormously popular Candy Crush Saga and its follow-up Candy Crush Soda Saga. In the most recent quarter, these games accounted for 39% of King's gross bookings (about $206 million), which was down from 59% ($360 million) a year ago. The series also has a very impressive 98 million daily average users (DAUs) as of the most recent quarter.

Farm Heroes Saga: Another "match 3" puzzle game, this time matching different crops to meet the goals of the different puzzles. Farm Heroes has roughly 20 million DAUs.

Pet Rescue Saga: Another puzzler, where players match boxes of similar colors to remove board pieces and "free" animals once they reach the bottom. 8 million DAUs.

Bubble Witch 2 Saga: Aiming colored bubbles at the board, matching 3 bubbles to clear the board. Also about 8 million DAUs.

For over 2 years now, King has had 3 games in the top 10 of Apple's App Store and Google Play, a pretty impressive feat. The company has shown the ability to follow up its breakthrough hit Candy Crush with solid follow-ups and extensions.

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Disclosure: Steve owns no stocks referenced here.

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Oren Adler, CPA 4 years ago Member's comment

I got burned with Zynga. There are too few Ataris in the world, gaming companies that can make the long haul. I doubt I will ever invest in an app game again. I fear these games are fads with a shelf life counted in nano-seconds.