'Candy Crush' buyout masks mobile gaming problems

Published Tue, Nov 3 201511:48 AM EST

Mobile gaming stocks traded higher Tuesday on the news Activision Blizzard is acquiring "Candy Crush" developer King Digital for $5.9 billion. The price was a 16 percent premium from Monday's close. But investors may want to think twice before assuming this event will spark a wave of consolidation in mobile gaming. Or even that the dealmaking makes any of these companies more valuable. King Digital is unique in the space due to its large audience — it has two of the top five grossing mobile games, according to the latest App Annie sales charts, and has other special attributes, which made it attractive to Activision Blizzard. "King has strong wholly owned intellectual property (not reliant on licenses), with scale (330 million unique monthly users), a global audience and already high levels of profitability, which fit well within Activision's portfolio strategy," Baird's Colin Sebastian wrote in a note to clients Tuesday. By comparison, Zynga has minimal-to-no profits, approximately one-third the revenue scale and a lack of games near the top of the sales charts. Glu Mobile has even less scale at half of Zynga's revenue and is overly reliant on licensed properties. Shares of Glu Mobile and Zynga were trading up 5 percent and up 1 percent, respectively, Tuesday morning. Read More Give thanks for these perennial year-end winners Because King Digital is based in Ireland, Activision analysts also see the acquisition as a good use of offshore assets, which is generating little in the way of return in a low interest rate environment. Over 60 percent of the purchase price will come from the publisher's offshore cash balance. "Activision finds a creative, tax efficient way to use its offshore cash. It probably made sense for Activision to acquire versus repatriate, give the low probability of a tax holiday," Jefferies' Brian Pitz wrote in a note to clients Tuesday. However, Pitz is concerned about the merger since King Digital's sales are dominated by the "Candy Crush" franchise, which is in decline. In the second quarter, King Digital reported the "Candy Crush" bookings were down 28 percent year-over-year. After the deal was announced, King Digital pre-announced third quarter bookings results of $502 million, down 8 percent from the previous year, and monthly unique users of 330 million, down 5 percent year over year. "We expect a heavy doze of skepticism from (Activision Blizzrd) investors especially given the large deal size," Pitz said. There is an attractive play in the gaming space that is exposed to both console and mobile. Read More Top trader Najarian: Buy GoPro into the plunge Electronic Arts may perform well due to the upside potential of its upcoming "Star Wars" game this holiday. "We beta-tested EA's most important title of the year, 'Star Wars Battlefront,' and came away impressed," Pitz wrote in a note to clients in Oct. 9. He added, "Graphics are perhaps the best we've ever seen, for any game." EA's "Star Wars" game is slated for release on Nov. 17, a month before the movie's launch, and has received very positive impressions from gamers and the press. Pitz has a buy rating on EA with a price target of $80, 12 percent upside from Tuesday's trading. You can find other "Star Wars" stock plays here .

Candy Crush saga game on iPhone

Simon Dawson | Bloomberg | Getty Images

Mobile gaming stocks traded higher Tuesday on the news Activision Blizzard is acquiring "Candy Crush" developer King Digital for $5.9 billion.

The price was a 16 percent premium from Monday's close.

But investors may want to think twice before assuming this event will spark a wave of consolidation in mobile gaming.

Or even that the dealmaking makes any of these companies more valuable.