2013 has been a year of consolidation with heavy M&A activity. There are many reason for this including the cheap cost of borrowing and the need for companies to either increase their growth, or at least uphold their current growth rates. From large mergers in the airline industry, beer, even ketchup... the time is right for Corporations to put their balance sheet to work.
With the increased interest in online/mobile gambling thanks the recent New Jersey and Nevada measures, as well as the incredible growth in mobile, I want to take a closer look at Glu Mobile (GLUU).
Glu is a mobile game developer that has been around since the introduction of the feature phone in the early 21st century. The price at nearly $6 last year has been on a treacherous slide as decisions were made to shift games toward social integration, and Freemium 2.0.
The stock is completely flat on the year at $2.30, even as online gambling has begun to unfold across multiple states, especially compared to Zynga's (ZNGA) 50% price appreciation.
Glu is a veteran in the mobile gaming arena and as of last year began a partnership with Probabilty plc, to start developing mobile gambling games with their original IP in the UK. This year, Glu Mobile also made a strategic investment of an undisclosed amount thought to be around $1 million in privately held Bee Cave Games, a gambling startup of ex-Zynga developers (Erik Bethke, Nimai Malle, and Jeremy Strauser) info found here. Bee Cave games currently has "BlackJack Casino" in private beta on Facebook (FB), and is looking to expand aggressively through it's strategic partnerships.
So let's take a closer look and explore some of the possible acquirers of Glu Mobile, and why they are thought to be interested in Glu in the first place.
There have been a lot of rumors about FB's interest in buying Zynga. I do not find this likely for a few reasons. Why would FB buy Zynga when they are trying to diversify the types of games offered on FB to ensure the most successful games are brought to their platform? It makes more sense for FB to collect their fees and advertising from games that become successful, instead of incurring the expense of trying to create and promote their own games, which may or may not be successful.
The compelling reason to buy ZNGA is for their online user base. FB doesn't need Zynga's online user base. FOr one, Zynga got their users from Facebook, and they already have the largest active online user base of any company in the world.
What is more likely, is that FB acquire a smaller firm with a much smaller market cap, and gear them specifically for Gambling. They can then make their gambling games the only ones allowed on the Facebook platform, and cite regulatory restrictions as the reason only their games are allowed on FB, thus cutting out the competition. This makes Glu Mobile or smaller Bee cave games like companies more likely acquisition targets for Facebook. With Glu at a $150M market cap, Facebook wouldn't have to blink. They would also simply be paying for the developer talent and management expertise in mobile game development, and at a MUCH discounted price.
This takes us to another likely acquirer... Zynga. Zynga loves to buy companies, and quite frankly they need to in order to maintain their growth in the face of their new independence of Facebook.
Glu mobile has been cited in several of the same news releases as Zynga regarding mobile gambling, and as a previous article by John Dreamer "Is Glu a takeover target? Can Zynga afford it?" notes, the competition and loss of revenue Glu will pose to Zynga is far greater than what the purchase price would be at Glu's current market price. With Zynga shutting down more and more of it's underperforming studios, they decrease their growth potential even further. With the savings they will realize on the expense side, they could easily acquire Glu for cash or equity, or a combination of both. That would thwart any future challenges or competition that may arise from either Glu, or a larger competitor that acquires them.
An acquisition of Glu Mobile would be a particularly smart move for Zynga because they would be acquiring some of the best developers in the space, further expand their international reach, gain knowledge of monetization on mobile for their other games, and help quickly expand across all platforms (Android, IOS, Amazon, Windows). Even further, they would be able to adequately fill the vacancies in management with seasoned and experienced executives, acquire the original IP of Glu, and be able to further exploit the gambling initiatives and partnerships Glu already has in place.
The only Challenge with this scenario is that Pincus may again prove not to have the foresight to recognize the opportunities and threats posed by Glu Mobile.
Brick and Mortar Casinos
Though online gambling is still a fledgling, it's not just the state's budgets that stand to benefit from the move to legalize gambling online. Casino's profits have been dwindling in Atlantic City and other states with legalized gambling (albeit Nevada). An expansion to online would open up gambling to many more users, and those gamblers would be able to gamble a lot more often, at a much lower expense than actually having to travel to a casino.
Some think opening the doors to online competitors will mean doom for the Brick and Mortars… and they have a valid point. Increased competition in an industry that had a very high barrier to entry must be a scary thought to existing players. After all, we've seen what Amazon (AMZN) has done to the likes of Best Buy (BBY) and other large retailers. Without the expense, but all the profits, online gambling will be extremely lucrative. Judging by the stock prices, investors in Wynn Resorts (WYNN), Caesar's (CZR), Boyd Gaming (BYD) and other's have been on a tear since online gambling was legalized Nevada and New Jersey, meaning investors have confidence that they will be able to capitalize and prosper in the new online space.
Casino's know the game, and are going to move fast to protect their stronghold on the gambling industry. In my view, they have a couple options. They can't just start developing games on their own, so they will need someone to develop for them. International Gaming Technology (IGT) and others, have been the traditional partners for providing games inside the casino, but online development isn't their specialty. Thus someone in the online space will be needed. This means they can hire, contract, partner, or purchase a company to manage these operations. While hiring is a viable solution, this includes upfront and future costs, as well as management and continuous tech support for the site/games.
What makes the most sense, is they acquire a company to develop, troubleshoot, integrate, and manage the new division. Casinos hold their cards close to their chest, and with so much revenue on the line, I wouldn't count on them trusting such a large amount of money completely in someone else's hands.
Hany Nada/Private Equity
Hany Nada, an insider of Glu, and was previously a Wall St Analyst at Piper Jaffray. Nada is the managing member of GGV capital one of the top venture capital firms in the United States/China, and his recent investments include athenahealth, Endeca, (acquired by Oracle), Glu Mobile, Kintana (acquired by Mercury Interactive), Turbine (acquired by Time Warner) and Xfire (acquired by Viacom). See anything telling of his investment strategy? Which two are not like the others… (yet)?
Nada was an original investor in Glu Mobile, and sold his stake in the $5 range. Him buying back in with such a large stake at $3+ a share ($9.9M) and now holding a 9+% stake in the company, says good things about the future of Glu. It also bodes well for investors that the stock is currently down 25% from when he initiated his investment, as he will most likely increase that stake, or take measures as a director of Glu, to increase shareholder value.
Furthermore, Nada or another private equity company, may even take the company private and gear it specifically for the online gambling space. They could continue to support the already successful mobile games to keep bringing in revenue while they develop their "Mobile Casino". Private Equity already has an interest in the company as the top holders of Glu include NEA Management, GGV Capital, Canell Capital LLC, BlackRock, and S Squared Technology Corp.
Mobile's challenge is monetization, as only 1-2% of total users spend money on in app purchases in the "freemium" game model. Gambling provides monetization on 100% of users, and estimates suggest $10-$20 per day in revenue per active user could result. Turning the company profitable, quickly capitalizing on online gambling, and flipping it in a year or two, would prove incredibly profitable for any entity… even the high flying multiples that venture capitals crave.
Acquisition aside, Glu is still undervalued, but it's their own doing.
Below, I have listed some reasons why Glu has been in such an aggressive decline, and why the pain for long term investors may finally be over.
Reasons for the slide to 52 week lows:
Glu Delayed several titles late last year including Stardom A-List, Contract Killer 2, Gun Bros, and Dragon Storm (all of which have been released already this year) in order for new head of Studios, Matthew Richetti Hired in October to review the games. Richetti came from Kabaam, where he was head of Kingdoms of Camelot, one of the most successful top grossing games in the space, and was hired to help Glu improve monetization of it's games.
The Apple app store banned Tapjoy (an advertising platform) from applications, which cut a large chunk of advertising revenue from Glu's bottom line.
Glu lowered Q3 guidance (albeit an earnings beat)
Glu lowered Q4 guidance (on yet another earnings beat)
Profitability, which was originally thought to occur in 2012 was pushed back to 2014, due to the items listed above.
There has been a shift in sentiment on mobile gaming stocks and the lackluster Freemium model.
Fund ownership flowed into Glu as it approached the $5 range, but as it dipped below $3, funds and institutions have been fleeing. With a stock that has an average daily volume of just over 2M shares and only 66M shares outstanding, there have just not been enough retail investors to purchase the large number of shares that have been sold.
Analyst downgrades began to come in, though their price targets were still $3 and above, a healthy return for anyone.
A little cherry on top came when Director Matthew Drapkin had a planned sale of around $2M in stock after the Q4 earnings release on Feb 5th to further frighten already skittish investors.
All of these things clearly lead to a substantial drop in Glu's share price, and justifiably so. But with every adversity, is the seed of equal or greater opportunity. So what does Glu Mobile have going for it?
Why Glu is currently undervalued:
Glu has consistently exceeded analyst estimates, and come in at the high end of their own guidance, but have continued to guide lower as they finish their shift toward freemium 2.0. With the delayed games already having been released this quarter, and performing well in the stores, Glu will have no problem exceeding revenue expectations again and will likely guide higher for the first time in over a year.
Glu is diversifying risk and exploring new revenue opportunities with a new developer division in which they help successful games from various regions reach a larger market and other platforms for a share of revenue. Glu has not accounted for any revenues from this new division in their 2013 forecasts. There is ever increasing popularity and competition in mobile gaming as more and more smartphones and tablets are sold every day. A platform such as this would be very beneficial to "mom and pop" games like Temple Run, and MineCraft that have developed a successful game, but need to get it out to the world quickly. This new division of Glu also allows those developers to take advantage of their knowledge and experience in monetization.
Glu has its gambling partnerships with Probabilty PLC in the UK and has invested in Bee Cave Games in the US, but has not guided for any revenues from these sources either in their 2013 guidance.
A return to profitability this year looks increasingly promising, as the closure of underperforming studios and successful game launches with increased monetization will provide a boost to revenues.
Glu has not seen an appreciation in stock since gambling prospects have come to light (up 0% this year), as investors have focused on larger well-known names in the space such as Zynga (up 50% on the year), and traditional casinos.
The short interest in Glu is at 18% of float, with 5+ days to cover. Any positive catalyst such as raised guidance, or an analyst upgrade should make quick work of the $3 range.
3 other insider purchases occurred in November after Hany Nada's purchase in October, including a purchase by CEO Niccolo De Masi.
Over 50% of the company is held by insiders and institutions.
The lows of Nov 16th 2012 ($1.99) and Feb 6th 2013 ($2.00) make for a textbook double bottom if Glu breaks through $2.90, a previous high set on Nov 29th 2012. The stock has also been on an uptrend since The low of Nov 16th.
All of these other points aside, Glu Mobile makes really good games. The graphic are great, and consistently rank in the top charts of free titles in all stores. An improvement in monetization alone should return Glu to profitability in no time, and thus putting the stock in a much better position going forward.
No stock is perfect, but knowing the pro's and con's and future prospects of the company can give you much insight to whether it is a good investment for your portfolio or not. The question about Glu is whether or not someone besides preschoolers are acquiring a taste for it.
Disclosure: I am long GLUU. I will not initiate any new, or close any positions in GLUU in the next 72 hours, as I am a long term investor, waiting for an acquisition announcement.