Since 1996, I have tripled my money every three years or so, on average. In 2009, I started sharing my Wall Street expertise with Main Street investors via my popular "Poised To Triple" series on Seeking Alpha, along with my free PTT Insider newsletter. In 2013, I founded PTT Research to deliver investment wisdom and my very best picks to a large and growing subscriber base.
It was an exciting week for our portfolio. Attunity (ATTU) reported Q4 results and Zynga (ZNGA) delivered news that impacts one of our top picks, Glu Mobile (GLUU). Here's our analysis of both events:
Attunity Reports Q4 Results
On Thursday morning, ATTU reported Q4 results, which I covered live on Twitter. The company beat on the top line, but missed on the bottom line. Bad news? No! As crazy as this might sound, the top line beat actually catalyzed the bottom line miss. Here's why…
After listening to the earnings conference call (I highly recommend that you read the transcript here on Seeking Alpha), it became clear that they are now seeing so much opportunity and demand that they decided to accelerate their investments in sales and marketing. In fact, those expenses represented 46% of revenue in the quarter, up from 41% last year.
That's a big deal, because as a company gets larger, the percent of revenue spent on sales and marketing typically goes down (it's called economies of scale). Here's what CEO Shimon Alon had to say:
"In order to capitalize on the positive momentum and accelerated profile growth, we have taken a strategic approach to grow our operation and meet the increased demand. Recently, we have appointed a new VP of Sales in the EMEA region who has been effective in deploying sales resources in high-cost areas such as the Nordic region, France and Germany.
In addition to these people, we also hired a number of highly-specialized sales people in other key markets in the U.S., bringing the total number of sales people to 25 from 15 at the end of the third quarter…and plan to hire several additional sales people throughout 2014, actively increasing our global footprint in the more untapped regions. Marketing activities continued to extend to keep pace with the sales expansion efforts."
It can be assumed that the extra 5% (46% - 41%), and probably a bit more than that, was essentially an investment in their future growth. That explains why their reported Sales & Marketing expense was up 43% versus Q3. I actually consider that to be very good, considering that they grew their sales force by 60% (from 15 to 25) from Q3 to Q4. By no coincidence, their 2014 guidance calls for revenue growth of up to 46%.
After a rough start to 2013, they showed great progress in Q3 and Q4. The stock has responded by nearly doubling since the Q2 earnings report. Hopefully, that progress will continue. Judging by the last few quarters and Mr. Alon's multi-decade history of success, there's good reason to believe it will.
Zynga Provides A Boost To Glu Mobile
On Friday, shares of Glu Mobile bucked a sharp decline in the market by rising 5.3% to $3.95. The catalyst was its competitor, Zynga, which announced the acquisition of game-maker NaturalMotion for $391M in cash and approximately 39.8M shares of Zynga Class A common stock. This equates to approximately $550M, based on ZNGA's most recent share price.
Despite the big price tag, the deal is expected to generate bookings of just $70 to $80M this year. As such, sales could end up being closer to $60 or 70M -- 50% of what GLUU will likely produce over the same time frame. Thus, the deal represents a huge takeout valuation of 7-9x sales versus GLUU's current valuation of 2x sales.
NaturalMotion and GLUU are two different companies, so extrapolating has its drawbacks. That being said, the math would imply an $850M - $1.1B takeout valuation for GLUU ($11-14 per share). We believe that a console-gaming giant like Electronic Arts (EA) would represent a good suitor.
It should be noted that ZNGA also announced Q4 earnings that beat Wall Street estimates on the top and bottom lines. Clearly, investors should view all of Thursday night's tidings as a positive sign for the entire mobile gaming sector.
The Internet mega-vendors certainly seem to believe in the market opportunity. Amazon (AMZN) is rumored to be developing a sub-$300 set-top/game console that will run on the Android operating system. According to a Seeking Alpha news alert,
"Google (GOOG) is also working on an Android set-top/console."
"Apple (AAPL) is reportedly planning to launch a refreshed Apple TV with game support."
"Amazon, Google, and Apple's rumored devices are all seen trying to disrupt the traditional console market by offering cheaper casual gaming/video-streaming systems that support the rapid porting of mobile games."
Needless to say, this is very bullish for mobile game developers like GLUU. Soon, there will be an even larger installed base of devices on which their games can be played. For GLUU, the new gaming devices could be especially beneficial. GLUU has a reputation for developing some of the industry's best and most visually-stimulating titles. As successful as they are on mobile phone, I expect the experience to be magnified on large-screen TVs.
The company reports earnings on Wednesday. I expect a positive report and continued success as we move through 2014 and beyond. Before long, I expect that short-sellers (which represent nearly 20% of GLUU's shares) will come to realize that this isn't a hit-specific play, based on the success of Deer Hunter, but rather a secular play on its new monetization platform and the ongoing explosion in Android and iOS proliferation.
Accordingly, I continue to believe that shares of Glu Mobile are poised to triple.
Additional disclosure: Mr. Gomes’ investment Methodology is the basis of his selection process, as well as his asset allocation and trading decisions. Investors who seek to act on his research should first read his Methodology at PoisedToTriple.com.