Being a gaming enthusiast, I am a firm believer of the notion that hardcore gamers prefer console and PC gaming over mobile gaming. Thus, for this reason, I have always doubted the future of the companies like Zynga (NASDAQ:ZNGA) and Glu Mobile (NASDAQ:GLUU) as they rely too much on mobile gaming. Though both these companies have managed to perform nicely in the last couple of months, I believe the launch of next-generation consoles-PlayStation 4 and Xbox One-will hamper their growth in the foreseeable future. Hence, I think investors should stay clear of both these companies. I will tell you why, but first let's take a look why stocks of Zynga and Glu Mobile have appreciated over the last few months.
Impressive Quarterly Performance Driving Growth
Zynga reported a loss of $0.03 per share significantly lower than the consensus estimate of a loss of $0.09. Also, the company reported revenues of $202 million, easily beating the consensus estimate of $148 million. The strong quarterly performance instilled confidence in investors and consequently, Zynga's shares have jumped nearly 13% since then.
Moving on to Glu Mobile, the company reported a loss of $0.07, beating the consensus estimate by $0.03. On the revenue front, the company reported a figure of $22.60 million, which was more than the consensus estimate of $20.30 million. As a result Glu Mobile has appreciated nearly 18% since October. The impressive quarterly performance of Glu Mobile was primarily driven by the success company's blockbuster title called Deer Hunter 2014.
Console Launch Will Harm Their Growth
Gamers all around the world were eagerly waiting for the next-gen console cycle and they didn't shy away from spending hundreds of dollars to get their hands on these devices. This is evident by the fact that both PlayStation 4 and Xbox One have been selling like pancakes. Moreover, the holiday season has also driven the sales and this is bad news for both Zynga and Glu Mobile for two reasons.
1. Both the consoles are fairly expensive. Sony's PlayStation 4 is priced at $399 while Microsoft's Xbox One is selling for $499. Furthermore, both these consoles are even more expensive in countries like Australia and India.
2. Console games are very expensive.
It's obvious that the new console cycle has dried out the pockets of many gaming enthusiasts and as a result they will have less money to spend on mobile games. Consequently, the mobile gaming market will suffer, at least for a few months, and hence Zynga and Glu Mobile will struggle to improve their margins.
More Reasons To Stay Away
Zynga investors have their hopes pinned against the arrival of Don Mattrick, Zynga's new CEO. However, I think investors should realize that Zynga's turnaround is not guaranteed and there are a couple of good reasons for that.
Firstly, I think that the arrival of Mattrick is overestimated, primarily because he has a glorified reputation. It is broadly assumed that in his earlier tenures with Electronic Arts (NASDAQ:EA) and Microsoft, Mattrick was quite successful. During his time at EA, Mattrick was in the limelight for working on the development of chart-topping games such as Need for Speed, The Sims, and FIFA. Mattrick was widely praised for the development of these games, but these games were merely continued franchisees and Mattrick wasn't responsible for making any severe changes to these franchisees.
At Microsoft, Mattrick was overseeing the Xbox 360 and PC gaming. During his time, Xbox witnessed an increment of 66 million in its user base worldwide. Mattrick's tenure at Microsoft was quite good, but then he messed up the deployment of the next-generation console Xbox One. Xbox One has been bullied in sales by its primary rival- Sony's PlayStation 4 - and Mattrick's decision to impose five unwise features onto users was largely responsible for it. The bungled up launch of the new platform is considered as the primary reason why Mattrick jumped ship from Microsoft to Zynga.
Secondly, Zynga's notable quarterly performance was an outcome of Mattrick's cost cutting initiatives. While there's nothing bad in reducing losses, you can't expect these initiatives to drive long-term growth. Zynga will have to come up with chart-topping games in order to sustain growth, and as of now, it is failing to meet this goal.
Moving on to Glu Mobile, the company's recent success has solely been driven by Deer Hunter 2014. But this can't go on forever and the company will have to come up with new chart-topping games regularly, which I don't think is feasible. Due to the limited screen size and complex usability of smartphones, it's very difficult for developers to regularly come up with games that attract gaming fanatics. Thus, expecting Glu Mobile to deliver blockbuster games regularly is not plausible.
A Stock Worth Buying
I am obviously not a fan of mobile gaming, but that doesn't mean I doubt the industry's future. Analysts are estimating the mobile gaming market to be worth nearly $23 billion by 2017, and I do think that this market has a good future. But as I said, console and PC gaming market will hurt the sales of mobile games. So, I think it will be best for investors to bet on a company that has its fingers in every pie and I reckon Electronic Arts falls under this category perfectly. The company is making the right moves to benefit from console, PC and mobile gaming market.
Electronic Arts has already appreciated more than 85% in 2013 and it may grow further due to its strong product pipeline. The company will launch numerous new titles to support the next-generation consoles while servicing consumers using the current generation consoles. To achieve this, the company has already launched many of its blockbuster titles like FIFA 14, Madden NFL and Battlefield 4 for the current as well as next-generation of consoles.
Also, Electronic Arts has also authorized a $500 million share buyback, which signifies that the company is firm on its objective of returning value to its shareholders. In addition to that, the company is also targeting the massive Chinese online gaming market and has tied up with Tencent. It is planning to launch online versions of its most popular games like FIFA and Battlefield.
In addition, Electronic Arts has officially declared that it will go entirely digital in the near future, which means that physical copies the company's games will no longer be sold. A move like this may take time but it has dual benefits. Firstly, as the digital copies of the games can't be resold, it will increase its sales and it will also save the company money as it won't have packaging and shipping costs to contend with.
Furthermore, Electronic Arts is aggressively moving into the lucrative mobile gaming market and is planning to release 15 new mobile games next year. It recently released Plants vs. Zombies 2 on iOS and it witnessed a record 15 million downloads in just five days. Given the brand's popularity, it is expected that the impending launch of the new mobile games will have a positive effect on the company's revenue.
As I already said, due to overspending on new consoles and games, gamers will have less money to spend on mobile games and as a result, I think mobile gaming will take a severe hit. So, I think investors should stay away from Zynga and Glu Mobile as it is highly likely that these companies will suffer because of the competition from PlayStation 4 and Xbox One.
Moving on, I think investors should consider buying EA rather than Zynga and Glu Mobile, primarily because of the company's strong product pipeline and its presence in the console and PC gaming market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.