Kim Kardashian and new Candy Crush apps please investors

Aaron Pressman
Mascots dressed as characters from the mobile video game "Candy Crush Saga" pose outside the New York Stock Exchange ahead of the IPO of Mobile game maker King Digital Entertainment Plc March 26, 2014. REUTERS/Brendan McDermid/Files

Candy Crush Saga and Kim Kardashian: Hollywood were big hits with gamers last year, but the question remained whether they’d be winners for investors in the companies that made the apps, King Digital Entertainment (KING) and Glu Mobile (GLUU).

After both companies just reported fourth-quarter results, it looks like investors will join the party. Shares of King were up 13% at midday on Friday at $16.65, and reached $18 briefly for the first time since August, after it reported big gains on Thursday. Shares of Glu, at $5.13, are up 33% since the company reported its results and a new game deal with pop star Katy Perry, on Feb. 5.

I’ve long argued that mobile gaming could be a sustainable business, following in the path of Hollywood studios, music record labels and videogame studios. There’s also an element of Las Vegas, as the companies analyze who is playing and tailor their apps to appeal to the biggest spenders. Last April, I put my money where my mouth was and bought shares of King, which I still own.

It’s been a rough ride. With Candy Crush revenue sinking faster than most expected, shares of King dropped from $24 at the company’s IPO on March 26, 2014, to a low of $10.68 last October. Shares of Glu shot up to a high of $7.60 last July over reports of the Kardashian app alone bringing in over $200 million. But they plummeted to as low as $3.27 by last month -- a 57% loss -- as it became clear that despite being able to melt the Internet with her naked rear, Kardashian alone could not reach $200 million.

Now comes a reversal again, with investors seeing evidence that the mobile game companies can succeed over the long term, albeit with very different strategies.

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King reported total bookings in the fourth quarter of $586 million, beating analyst expectations of $541 million. And adjusted earnings per share of 57 cents came in 10 cents above what analysts expected.

The beat came not from Candy Crush but from surprising growth in the company’s other hit games, including Pet Rescue and Candy Crush sequel Candy Crush Soda. Those titles brought in $324 million, over half of the total for the first time, and up 23% from the prior quarter. That also exceeded the latest decline in revenue from Candy Crush itself, meaning the company could be back on a path to growth.

Different strategies, both paying off

King uses analytics and experiments to create games, and features within games, to attract more players and get those players to spend more money. New games get promoted to the network of players attracted from previous hits, as well as via healthy doses of online and television advertising.

The fourth-quarter results appeared to validate that strategy as a reliable hit maker. The number of daily active users reached 149 million, up 4% from the prior quarter and 20% over the past year. And while the number of paying players per month ticked downward again by 4% to 8.3 million from the prior quarter, the average amount each paid rose 12% to $23.42. King says the shift resulted from its decision to make players buy virtual currency ("gold bars") for in-game purchases. That means players make purchases less frequently but in larger amounts.

Glu has different strategy, building franchise games around media celebrities or other pop culture hits. After its success with the Kardashian game, the company sought out more stars such as Perry. Further deals will be forthcoming, CEO Niccolo de Masi told analysts last week.

"Glu now has partnered with two celebrities with a combined social following of over 240 million,” he noted. “We intend to continue expanding upon our entertainment partnerships on an ongoing basis and have a number of later-stage discussions underway. I anticipate Glu titles having the support of over 400 million social channel followers by the end of 2016."

The company is also planning to launch games based on the next James Bond movie and the upcoming "Terminator: Genesis" movie.

Glu's fourth-quarter results also surprised analysts. Sales of $72.9 million topped analyst forecasts by almost $10 million. Adjusted earnings per share of 11 cents exceeded the average analyst estimate of 2 cents.

Two very different approaches, both paying off.

The same couldn’t be said for early mobile-gaming pioneer Zynga (ZNGA). It continued to struggle and disappoint without a coherent strategy for generating new hit games. Its shares dropped nearly 16% to $2.24 in midday trading after the company reported sales that missed analyst expectations for the fifth time in the past six quarters.

Maybe CEO Don Mattrick should get on the horn with Hollywood.

(Aaron Pressman owns shares of King Digital Entertainment.)