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I have been preaching for some time that Glu Mobile (GLUU) is an acquisition target. That preaching has increased of late with my articles "Why Zynga needs to buy Glu Mobile" and "Glu Mobile is an Acquired Taste", as I believe the window is closing for Zynga (ZNGA), the company that it actually makes the most sense for... as more and more companies become interested in the name, and the stock price continues to rise.

Glu likely could have been acquired for around $5 as recently as last week when shares of the company were trading in the low $2 range, and investor confidence was in the dumps as the stock price declined from around $6 six months ago, a near 65% drop. A purchase price at $5, a 100% premium to current levels but below last year's highs, would have been a great value for both parties.

The stakes have since been raised, as Glu Mobile is the first of the American companies to launch real money gambling through its partnership with Probability PLC in the UK. Tuesday, the stock was up some 25% before the shorts and profit taking were able to push it back to 2.83, still an 18% gain on the day. The stock is again up a few percentage points today, trading around $2.90 a share, and there is still a lot of room for it to run, as the volume yesterday was 15x the average daily volume, and volume is heavy again today.

There are many future catalysts for a price appreciation in Glu Mobile…

Glu's Current Games

The company has launched several games already this quarter, and is benefiting from improved monetization, social integration, and the availability of those games across the various platforms. Glu currently has 8 games in the top 100 free games on Mac, 3 of which are in the top 50 grossing games on Mac, and 2 of which are in the top 100 grossing of all apps for Mac. Glu is now starting to release games across multiple platforms upon launch. Opening the games to more platforms early instead of slowly rolling them out across platforms through updates will allow Glu to take advantage of additional revenues upon the hype of the launch.

What is particularly important about its success on Mac is that Glu is planning on moving into the at-home television space with more deeply engaging games. This plays to the recent success and excitement surrounding OUYA, a kickstarter funded start-up. OUYA is Android-based and brings free to play games developed on the open source Android platform to your TV with the $99 console. This is a new growth market, which Glu is able to quickly move into and grab revenues. Being a new platform, it will have much less competition than the current app stores, and plays perfectly into Glu's freemium business. Glu has approximately 600 employees and full-time contractors, 6 global studios, and 18 development teams. Those companies with the capabilities to roll out games quickly stand to benefit the most from this new disruptive market.

The difficult part of gaming is the development of successful titles. Glu already has a steady track record of those, and adapting them for a new platform incurs very little expense. I also expect ARPDAU (average revenue per daily active user) on Mac and TV to be higher than on mobile devices, as people are more likely to see more value in the game and be more engaged vs. a mobile phone. This extra revenue should provide a nice boost to Glu's bottom line.

Changes In Business Model

Glu appears to have gotten on the right track since restructuring and refocusing on the future. The company has made several changes to its business model, including the integration of social aspects to its games (deemed Social 2.0), its new 3rd party publishing division, and its move into mobile gambling. No revenues from any of these changes were accounted for in 2013 guidance, leaving much room for a huge upside surprise.

Future Short-Term Catalysts

Improved Monetization - According to Glu's 4th Qtr earnings release, 2012 revenues were $87.8 million while monetizing just 1% of its monthly active user base (MAU). Gambling monetization, on the other hand, is effectively 100% as users are spending money on every transaction. With this in mind, each percentage improvement in monetization doubles 2012 revenues. With gambling now in the picture, if Glu's business next year is comprised of 30% gambling revenues, monetization would improve from 1% around 30%. This would translate into $2.6 billion in revenue, a 300% increase! That's without accounting for any revenue growth from any new markets or its 3rd Party Publishing Division.

Upgrades to come - When analysts take note of these changes, the improved revenue potential, and the stock price surpasses their current average estimate of $2.97... they will be forced to upgrade, reiterate, or raise their price targets on the stock.

Earnings Beat - Glu has exceeded analyst estimates each quarter for the last 12 quarters. This quarter will be no different, except that it should be a very nice beat.

Turning Profitable - Glu was supposed to turn profitable last year, but delayed its profitability estimates to 2014 as it tweaked its business model. With the recent developments, I believe profitability will come this year ahead of schedule, maybe even as soon as next quarter with the help of Glu's recent decreases in expenses/restructuring.

Raised Guidance - Improved revenues will enable the company to raise guidance, especially since gambling revenues will be coming in earlier than anticipated.

More Gambling Games - Glu has a head start on the competition, and should be able to quickly roll out titles since it already has a game live in the UK. This also makes it poised to jump into the U.S. market when the time comes. (Glu accounted for no gambling revenues in its 2013 guidance, mind you.)

State Gambling Laws - More states are working on passing mobile gambling laws, and PA and IL are getting close. We could hear announcements from either one any day now.

Federal Gambling Laws - With online gambling gaining more and more traction in states, I expect that Senate Majority Leader Harry Reid's proposal will be passed, as uniformity is needed in multi-state gambling laws.

Roth Capital Presentation - Expect to hear some big developments and announcements at this conference. Just giving investors insights into Glu's mobile developments, move into television, and success in gambling should move the stock higher and drastically improve investor confidence.

Seasonality - Looking at the charts, Glu consistently outperforms in the 1st half of the year. Over the last 5 years, the return from January 1st-June 1st averages a 56% return!

2008: 15.3%

2009 145%

2010: -9%

2011: 67%

2012: 65%

Average 6 month Return: 56%

Only 1 of those years returned a negative return, and that was 2010, with a 9% price decline. The best performing year to date was 2009, returning an incredible 145% to investors in 6 months. Taking the average of 56%, Glu should start June at around $4.04. That is a 40% return in three months from current levels. However, I am expecting an even greater return with the recent move into gambling.

Acquisition - Though I do believe Glu will be a successful company on its own, I think a partnership with or acquisition by a larger company with more capital and resources could leverage this potential, and would prove the best return for investors in both Glu, and the acquiring company.

Option Activity - Options tend to be a good tell of future things to come, and as of yesterday, call volume really picked up in shares of Glu. Most of the $2.50 calls traded above open interest, and for the first time in quite a while, the $5 April, June, and Sept calls were being bought up.

Short Interest - Glu currently has around 18% of its float short. With yesterday's move, it's hard to tell where it currently stands, but any future developments or moves higher in the price could trigger a major short squeeze.

Conclusion

Any company looking at Glu should take this chance to grab the stock before someone quicker does. The window is closing as more and more companies are going to become interested in the stock. Where once there would have only been other mobile gaming companies, the competition now also includes:

Console game makers Electronic Arts (EA) Activision Blizzard (ATVI), and International Gaming Technology (IGT)

Social plays Zynga, Facebook (FB)

Brick and mortar casinos Wynn (WYNN) and Caesar's (CZR), and Las Vegas Sands Corp. (LVS)

Private Equity groups New Enterprise Associates, GGV Capital, or any other player wanting to get into the mobile gambling/gaming space.

Taking everything above into consideration, I have a $5 price target on Glu Mobile by June of this year. By June, I expect the company to have returned to profitability, released more titles including gambling games with Bee Cave Games, gambling regulations in the U.S. to be ironed out, and the company to double revenues on the successful launch of the delayed games from last year in the 1st quarter, as 80% of revenues come from newly released games in the quarter.

In addition to the projected increase in revenues, the stock currently has an analyst growth estimate of 181% next year, and a 30% growth rate per year for the next 5 years (according to Yahoo Finance). An acquiring company will have to pay an increased multiple on earnings because of this growth, and I believe there will be enough interest for a bidding war to ensue. This leads me to believe that an acquisition price could exceed $10 by as early as June of this year -- making the point that companies interested in acquiring Glu should do so in short order. On yesterday's volume of almost 30 million shares (50% of float), I am not convinced someone didn't gather up a large interest in the company already.

A stock's price is supposed to reflect 8 or so months into the future…If you believe Glu will still be in the $2 range by the end of 2013, then by all means, invest elsewhere. To me, the opportunity in Glu Mobile is just too large to pass up, and I think certain companies are beginning to see that, too.

Source: Glu Mobile's Acquisition Price Could Surpass $10