NEW YORK (TheStreet) -- Shares of Candy Crush Saga maker King Digital Entertainment (KING) have skyrocketed more than 17% since June 25 and reached above its IPO price in recent sessions, catalyzed by a series of upbeat sell-side analyst reports as well as end-of-quarter short covering.
Within the past couple of weeks, King Digital has been trading near or even exceeding its $22.50 listing price in late March. Many investors thought such days would never arrive after King became one of the worst-performing IPOs of 2014.
Optimism for the stock has been gathering steam as analysts express confidence of less and less concentration risk for King, with the mobile gaming company showing signs that it can in fact diversify beyond its global, Candy Crush Saga hit. While the game's popularity peaked last year, both Pet Rescue and Farm Heroes have been able to maintain a top 15-grossing iPhone rank globally as a whole over the last six or more months, according to Piper Jaffray analyst Michael Olson. The large and growing mobile gaming market and the company's partnership with Chinese digital entertainment giant Tencent also has added to the enthusiasm. Olson is one of the sell-side analysts who are optimistic that upon its global launch in the second half of 2014, the Candy Crush sequel, Candy Crush Soda, could stoke the return of tens of millions of former Candy Crush users who were fatigued with the original game.
Bubble Witch 2 has also had a warm reception, quickly rising to become a top 20-grossing iPhone game after launching in early June.
But impending events could pose risks that would throw cold water on this renewed investor confidence and keep King stockholders under water.
Most immediately, King reports second-quarter earnings in August. Any changes to 2014 guidance would undoubtedly have the biggest effect on King's share price. A selloff could of course occur if the company gave any commentary that spooked investors like it did for the first quarter, where fewer bookings were posted for the maturing Candy Crush Saga. Analysts such as Eilers Research's Adam Krejcik are expecting in-line results and don't see the earnings announcement becoming a major, positive catalyst for King stock, especially after the recent run.
The other factor unfolding this year is the second half of 2014 launch of a Chinese version of Candy Crush Saga through Tencent's popular WeChat and Mobile QQ platforms.
With his recent upgrade of King Digital to "overweight" from "neutral," 12-month price target hike to $28 from $19, and 15% and 31% revenue growth projections for 2015 and 2014, Olson also acknowledges that his predictions are based on many unknowns. These unknowns include Candy Crush Soda's performance over time; King's long-term ability to generate hit titles beyond Candy Crush, Pet Rescue, Bubble Witch and Farm Heroes; whether Candy Crush Soda would eventually cannibalize sales of Candy Crush; and finally, if the company collaboration with Tencent will be successful.
King's expansion into Asia is most notably defined by its Candy Crush Saga partnership with Tencent. While it's difficult to quantify just how much of the Tencent-China story is baked into King's share price right now, it has been one of the bullish sentiment boosters risking a selloff with less than stellar results. That being said, of all the top King unknowns, the one that appears to have the most predictable outcome right now is the company's future in Asia. That could be that King could never really take off in the continent the way it has in the U.S. and Europe, even with its Tencent strategy. Competitor Zynga (ZNGA - Get Report) has failed in China via a Tencent partnership, with a weak footprint in Asia in general, has not boded well for Western social and mobile gaming companies trying to make it there. Currently, Asia accounts for a very small portion of King's overall global revenue.
"They [optimistic investors] think that there's going to be a big, certain move-up in China for King," says Krejcik. "But there's no evidence of that to date."
King's Candy Crush, Farm Heroes, and Pet Rescue, and Zynga's FarmVille have been among the top-grossing games in Europe and the U.S. very recently or at some point in time. In Asia, the biggest market for Candy Crush has been Japan, while Zynga is hardly on the radar there.
But while Candy Crush Saga does a lot better in Japan than it has in China thus far, the game still isn't performing as well in Japan as it has in the U.S. and Europe. Eilers Research data shows that Candy Crush was the 15th top grossing game on iOS in Japan in the second quarter vs. coming in at no. 80 in China and no. 5 in the U.S. and Europe. Meanwhile, being in the distinguished position of having the hefty financial backing of Japan's SoftBank, the Finnish Clash of Clans and Boom Beach maker Supercell has been an exception among Western mobile and social gaming companies trying to climb up the ranks in Asia, with Clash of Clans staying ahead of King Digital in Japan at no. 8.
Overall, the biggest games in Japan still originate from local Japanese companies, even with the availability of other puzzle and card-based mobile games in a country where the puzzle and card genres are well-liked. One of the most popular mobile games in the country has been Puzzle & Dragons from Tokyo-based video game corporation GungHo Online. Mobile messaging service providers like Line, developed by a Naver subsidiary in Japan, have been a dominant force in game downloads. Many of the top-selling games are Japan-based even for the PlayStation and Xbox.