Wednesday, November 4, 2015

KING of Value

A year ago, I wrote about King Digital as a potential value stock. Yesterday, the stock closed about 50% higher than it's level one year ago, as the company accepted a buy out offer.

I don't understand why this low P/E stock never got more respect. Yes, it was a bit of a one-hit wonder (Candy Crush), but it wasn't clear that the company didn't have the skills to put up a repeat performance: while subsequent games were never as profitable as Candy Crush, this game maker was consistently successfully monetizing games profitably, which is something the competition (e.g. Zynga) could not do.

I suspect they have a repeatable process, with lots of testing at every step (from development to marketing) that allowed them to kill bad concepts quickly while good concepts floated to the top. At least, this is what I gathered from reading up on the company. At a single-digit P/E, I certainly wasn't taking a lot of risk that I was wrong.

The company also seemed to make good capital allocation decisions, as I discussed in my original article. Companies that are cheap and run by good operators who allocate capital well is exactly what I'm looking for, so I could not turn down an investment in KING.

I can't say I knew that this acquisition would happen - it came out of left field for me. So maybe I was just lucky with this investment, and if it hadn't happened the company's new games would have failed while its one major hit would have continued its decline. We'll never know! I've sold my shares.

Disclosure: No position


Jimmy said...

Hi Saj;

Thank you for the follow up post and the link to original post , as well.
It was good to read both post and finding out the positives in the company.
It was good learning.

Have you ever looked at GLUU? I am on and off long on GLUU for short duration, profited but never took the long duration position

Baruch said...

Well spotted!

Saj Karsan said...

Thanks, Baruch.

Hi Jimmy,

I have not been interested in GLUU because they don't have the consistency in their results, which for me is an important factor in general, but especially in a high-tech industry.