Options Trade – King Digital Entertainment PLC (NYSE:KING) Calls
Monday, June 09, 2014

**OPTIONS TRADE: Buy the KING Nov 2014 20.000 call (KING141122C00020000) at or under $1.60, good for the day. Place a protective stop limit at $0.65 and a pre-determined sell at $3.00.

by Ian Harvey

June 09, 2014

Introduction

Since going public in late March, King Digital Entertainment PLC (NYSE: KING), a video game developer -- the makers of the Candy Crush game -- has been on a roller-coaster ride -- trading as high as $21.39 on its first day on the Big Board, only to plunge to a post-IPO low of $15.26 in mid-May. The volatility is continuing, with the stock up more than 4% at last check on Friday, to trade at $17.85.

This surge in price and also options call action could be the result of a couple of factors:-

• "vanilla" option bulls betting on a big run higher for King Digital Entertainment PLC, or

• that short sellers are hedging against a significant pop -- in fact, short interest surged 49.3% over the last two reporting periods, and now accounts for 13.6% of the stock's float.

Factors Influencing KING

1. They have Candy Crush, which is expected to have a long tail of bookings, is still growing its active users, and has a brand from which multiple spin-off titles can be created. A sister title is already expected to be announced in the second half of the year.

2. The market is underestimating the barrier to entry around marketing - there are a ton of games being added to the mobile stores. To be noticed you need to spend big bucks on advertising, which King has. They also have a brand awareness created by Candy Crush, and they have a network of over 300 million users that can be cross-sold and leaned on to create virality (term that means ability for a game to go viral).

3. King has demonstrated, by their success before, during and after Candy Crush, that they have the people and the process to churn out successful titles.

4. While the market is not pricing in success for Farm Heroes or for Diamond Diggers, both of these games are showing that they are successful. Farm Heroes in particular is in the top 5 games on Google-play and iTunes and is #2 behind Candy Crush on Facebook (FB), the first platform that it was released on (in the second quarter of 2013). In the table I presented earlier, note that non-Candy Crush growth in bookings has been very strong the last two quarters, which can be mostly attributed to Farm Heroes.

5. The company is just starting to move onto Korean and Chinese platforms and is working to improve brand awareness in Europe. Currently their user base is concentrated in North America. There is plenty of room to build out their user network further.

Analysts Opinions

Wedbush analyst Michael Pachter reiterated an Outperform rating and $25.00 price target on King Digital Entertainment PLC.

In the report, Wedbush noted, “Adjusted revenue was $608 million, compared with our estimate of $602 million, and consensus of $604 million. Bookings were $641 million, roughly in line with our expectations. Adjusted EBITDA was $249 million, compared with our estimate of $239 million. Non-GAAP EPS was $0.61, compared with our estimate of $0.64, consensus of $0.59. The company provided initial FY:14 guidance for gross bookings of $2.55 - 2.65 billion, adjusted revenue of $2.40 - 2.50 billion, and adjusted EBITDA margin of approximately 40% of adjusted revenues.”

Also, the company has been the subject of a number of research reports:-

JP Morgan (JPM) and Credit Suisse (CS) were among the slew of analysts to initiate their coverage on King Digital on a positive note. Some other positive coverage was initiated by RBC Capital, Cowen and Stifel.

The analysts’ positive stance on the stock points to the company’s traction in the mobile gaming market. With the rapid adoption of smartphones and tablets, analysts expect the demand for King’s mobile-based games to increase exponentially.

Conclusion

There is a reasonable chance that King Digital is able to continue growth. They build off of their Candy Crush franchise, create 2 or 3 more games that while singularly may not reach the popularity of Candy Crush, add some Candy Crush sequels and sister games, and together all of this is able to sustain and grow the business. If that comes to pass, and the company continues to generate $600 million plus free cash flow and shows it can even grow that number, the stock has to go much higher than it is right now.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the KING Nov 2014 20.000 call (KING141122C00020000) at or under $1.60, good for the day. Place a protective stop limit at $0.65 and a pre-determined sell at $3.00.



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