King Digital Entertainment PLC (NYSE:KING) received ratings from two prominent analysts firms on Monday. In a report dated May 5, 2014, analysts at JPMorgan assigned an Overweight rating to the stock with a price target of $30, while Stifel analysts, in a report dated the same day, initiated coverage on the stock, assigning it a Buy rating with a price target of $22.
King has a unique business model
In the past 10 years, King Digital Entertainment PLC (NYSE:KING) has managed to establish a portfolio of more than 180 game IPs, and the company has a structured game development process which is cost effective and low on business and financial risk, believe JPMorgan analysts Doug Anmuth, Kaizad Gotla, Diana R. Kluger and Won K. Kim.
Every month, King Digital Entertainment PLC (NYSE:KING) launches one or two proprietary core games. These titles are designed by a team of three within 20 days. In the beginning, players get the tournament version of the game on the company’s portal at Royalgames.com. Here, the company’s highly engaged VIP player base submits their feedback on the games. Those that are approved at this level are then launched in a Saga layer or Envelope on social networks, such as Facebook and Google+, and then eventually on mobile platforms like Apple Inc. (NASDAQ:AAPL)’s iOS and Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s Android.
In the fourth quarter, King Digital Entertainment PLC (NYSE:KING) had 408 million monthly average users (MAUs), 124 million daily average users (DAUs) and 12.2 million MUPs. In February 2014, King had 1.4 billion game plays per day, which is almost equal to Twitter Inc (NYSE:TWTR)’s number of daily tweets, according to analysts. The large user base gives King a substantial advantage, as it could maximize network value through “data analytics and targeted cross promotion,” which in turn lowers the “subscriber acquisition cost and profitability relative to competitors,” believe JPMorgan analysts.
Mobile gaming to dominate
Stifel analyst Drew E. Crum feels that King Digital Entertainment PLC (NYSE:KING) will be able to compensate for the drop in Candy Crush Saga by utilizing existing games and titles for a mass audience and leveraging its unique game development process to trigger success for its new titles. According to IDC, mobile app revenue will likely surge at a 29% compound annual growth rate between 2014 and 2016. King is also expected to draw substantial profits from mobile gaming, which is one of the fastest growing categories in interactive entertainment. Growth in mobile is expected to contribute 90% of gross bookings in 2016, compared to just 10% in 2012 and 70% in 2013, which is higher than that of Zynga Inc (NASDAQ:ZNGA), currently in the mid-30% range.