Why King Digital (NYSE: KING) Stock Fell 27% This Week

Update: After opening at $18.94 a share on Monday, King Digital (NYSE: KING) stock has since dived 27.84% to trade at $13.93 a share on Thursday. The bloodletting really began after hours Tuesday when the Dublin, Ireland-based social game company released second-quarter earnings that sparked a more than 20% plunge.

Three bad signals in earnings fueled the sell-off, and all three are tightly interrelated.

Why King Stock Plummeted 27%

The first was the "Candy Crush Saga" maker's sales.

While earnings were in-line with Wall Street estimates, sales were not. King reported adjusted earnings of $0.59 a share on $594 million in revenue, missing consensus estimates of $0.59 a share on $608 million in revenue. Sales weren't all bad - the company's revenue did increase 30% compared to the same quarter a year earlier. And profit rose to $165.4 million, up from $125.92 million the same quarter in 2013.

Second, the company lowered its full-year outlook and gave weak third-quarter guidance, a huge reason behind KING stock's sharp decline today.

It's now forecasting third-quarter bookings of between $500 million and $525 million, and said it expects gross bookings - the total amount of cash users spend on virtual items - for the full-year to come in between $2.25 billion and $2.35 billion. Gross bookings for the second quarter came in at $611 million (under the $640 million analysts had projected).

"While our second-quarter gross bookings came in below our expectations, leading us to reduce our outlook for full-year 2014 growth rates, from a profitability perspective, the business continued to perform well, delivering adjusted EBITDA margins of 42% and generating healthy cash flows of $154 million to boost cash and cash equivalents to more than $800 million," King Chief Executive Officer Riccardo Zacconi said in the earnings statement.

Lower gross bookings points to a dangerous trend for King - one that affects the backbone of King's value and serves as the third piece of information that has fueled today's KING stock sell-off...