I want to start of by saying congratulations to my fellow investors who decided to hold onto their shares of Glu Mobile (NASDAQ: GLUU) through earnings. The past several earnings releases have been difficult, but your patience did finally pay off. Management has finally been able to pull off a massive (albeit painful) turnaround. Some of you have taken your gains and one can not blame you... while others like myself are still holding for the big pay day. So this article is particularly for you all...
Shares of Glu experienced a nice pop on incredible volume after a record-breaking fourth quarter earnings report that blew away both Wall Street's and management's quarterly and yearly estimates. The small-cap mobile gaming company was expected to report break-even results, but instead shocked investors by reporting its first ever non-GAAP profit of $0.07 a share, on record EBITDA of $6 million. That is a beat of 1,650%! In addition to the beat on the top and bottom line, Glu also raised its 1st quarter and full year 2014 guidance estimates, making the company a triple threat in 2014.
Below I will give you an overview of some highlights from the 4th quarter, and present my case as to why I believe Glu's share price will reach double digits as soon as this year.
Highlights from 4th Quarter Earning Release
- Non-Gaap Revenues grew 90% quarter over quarter
- EBITDA came in at a record $6 Million
- Deer Hunter 2014's performance broke company records in every metric
- Eternity Warriors 3 (Launched December 31st 2014) is doing extremely well in Asia and will bring in 2X the lifetime revenue of the previous title in the series
- In 2014, the company will focus on franchises that are high margin, original IP
- Each of the new franchises released are expected to take in 2X the revenue of the previous version (though only the previous title's revenue figures were used for current guidance)
- Gluon has enabled the company to acquire users and keep them engaged at a lower cost, and in a more advanced way than ever before, giving the company a competitive advantage over peers
- Advertising revenue almost doubled from 13%-21% quarter over quarter.
- Gluon and deals that Chris Akhavan struck directly with advertisers, improved margins on advertisements and offers placed within games
- Daily Active Users grew over 50% quarter over quarter to reach all time highs
- Monthly Active Users grew 24% quarter over quarter to reach all time highs at 56.3 Million.
- Glu is improving monetization on Android as revenue from the Android platform grew from 29% to 36% of revenues
- Downloads totaled 79.6 Million during the 4th quarter
- Glu surpassed 600 Million cumulative downloads as of the end of 2013.
- Gross Margin expected to be 68% for 2014
- Anticipate opportunities in the living room from companies like Google, Apple, Microsoft, and Ouya
- Glu has launched the biggest mobile shooter of the year for 4 years straight
There were several positives from the call, and the entire conference call and supporting materials can be found on Glu's investor relations page here.
Analyst Opinion
Of the analysts that cover Glu, 2 currently rate it a Strong Buy, 6 rate the company a buy, and 1 a hold. Zack's also recently upgraded the company to a #1 Strong Buy based on the strong 4th quarter results and increased guidance estimates. Some of the analysts have weighed in by raising their price targets by 50%, while others have still yet to chime in on Glu's newfound success.
The consensus price target is currently $5.80 implying some upside, but I still do not think the analysts understand Glu Mobile. One only has to look at how poorly they estimated last years figures and the subsequent meager price target increases after such stellar quarterly results to understand what I mean. My opinion is that they continue to undervalue and under estimate not only the speed of the shift to mobile, but also Glu's monetization, hit rate, and global scale that will lend them to continued success and growth.
It is also of my opinion that Mark Gomes of research firm Poised to Triple has a better grasp of Glu Mobile. His firm conducts in-depth research to gain insight that is not readily available to the general public. He then provides that research to his subscribers and through here on Seeking Alpha. He has written a few articles about Glu recently and selected the stock as a top pick late last year. Mark noted that Glu Mobile is one of his firm's largest holdings due to the performance of Glu's Gluon platform that supports the company's games as a service model.
Mark has made some incredible picks such as Himax (NASDAQ: HIMX), Attunity (NASDAQ: ATTU), Lionsgate (NYSE: LGF), Facebook (NASDAQ: FB), and others. His track record says that Glu has a very good chance to do so as well. You can learn more about Poised to Triple and sign up for their newsletter through my referral link here.
While I do acknowledge that analysts are undoubtedly not always correct in their projections, they can be used as a valuable indicator in your overall investing strategy.
Positive Catalysts in 2014
There are many catalysts for Glu Mobile as I have pointed out in my previous articles, but what were once just "potential" catalysts, are now actually coming to fruition.
COLOPL Partnership
Glu entered into an agreement with COLOPL Inc, a top mobile gaming publisher in Japan, to co-produce games targeted at the Japanese markets, as well as help COLOPL expand into the western markets (WSJ article found here). This deal is very good news for Glu Mobile, as a quick look at the Japanese app charts shows COLOPL has multiple games that are in the top 100 grossing, with 2 currently in the top 5. COLOPL Inc's, market cap exceeds $3.1 billion, and could be a possible acquirer of Glu if COLOPL likes what they see in Glu.
Apple's China Mobile Deal
The highly anticipated deal between Apple (NASDAQ:AAPL) and China Mobile (NYSE: CHL) makes the iPhone available to 700 Million new China Mobile subscribers. Glu claimed in it's latest conference call that it is a currently the largest western market developer in the Asian markets, and thus stand to benefit substantially from this deal.
Current revenues from Asia Pacific, China and EMEA now make up almost half of Glu's total revenues, up substantially from 2012. Their continued focus on expanding in Asia and partnership with COLOPL not only diversifies their revenue stream, but makes them that much more attractive to a potential acquirer, as western companies have struggled to crack the lucrative and fastest growing mobile game market.
Another catalyst overseas is that the number of app stores are growing in Asia. According to Tech-Crunch reports (found here), huge companies like Alibaba and Softbank are getting in on the exploding mobile app market. The new stores like Wandoujia and Alibaba's plan to compete with Tencent by allowing developers to keep 70% of revenue, in order to boost participation by developers in theirs. This increased competition brings lower "fee's" cited to be as much as 50% less than the current level charged by the app stores. This move will greatly boost revenues by essentially doubling the amount of money developers get to keep by listing through these new stores. Asian gaming companies including COLOPL, GREE and others rallied as much as 20% on the news. Glu stands to benefit as well considering this market makes up almost half of its total revenues. A simple doubling of revenue from that region would instantly grow total revenues by 50%!
Short Interest
20.2% of total shares outstanding are currently sold short or almost 30% of the company's float. As the stock has made 3 new 52 weeks highs since earnings release, it looks like shorts are finally starting to lose their death grip on the company's stock. Any positive news or if the launch of Frontline Commando 2 is a successful as I suspect it will be, a massive short squeeze could ensue. To add insult to injury for the shorts, the breakout point is currently at $5.08 with no real resistance above that level.
The Mobile Sector Continues to Consolidate
Zynga's Acquisition of Natural Motion
Zynga (NASDAQ: ZNGA) announced its acquisition of mobile game developer and competitor Natural Motion when it reported its earnings ahead of schedule on January 30th of this year. The company cited its focus on the move to mobile and Natural Motion's technology as a main driver for the acquisition. Zynga purchased the company best known for hits such as Clumsy Ninja and CSR Racing for $527 Million, which is 7x Natural Motion's projected 2014 revenue estimates. The market rewarded Zynga (that has struggled in the move to mobile) with a hefty run in the share price after the announcement.
The purchase will certainly help Zynga diversify its portfolio of games going forward, and provides the talent to help with the transition to mobile… something that has been long over due for Zynga. It seems that CEO Don Mattrick is finally taking the steps to put the company on the path to success. I remain to be long shares of Zynga, but would really like them to make another strategic acquisition such as Glu Mobile, to branch out into mid-core/hard-core gaming, and really put them in a position to dominate mobile gaming.
FB's Acquisition of WhatsApp
Facebook announced on February 19th that it plans on acquiring WhatsApp for an estimated $19 Billion dollars in cash and stock. Though WhatsApp is not a gaming company, they are a mobile company. The start-up company has little to no current earnings, so how do you determine an acquisition price? By the number of monthly active users (MAU). Taking a look at WhatsApps MAU base, we can determine that the acquisition values each of the 450 million monthly active users at a hefty $42.22 each. I will explain how that valuation pertains to Glu a bit later.
Institutional Ownership
Institutions are also jumping into Glu Mobile. Year end holdings disclosure show that the majority are initiating or increasing their positions.
| Total | Shares Purchased | |
|---|---|---|
| Increased Position | 57 | 6.4 Million |
| Decreased Positions | 23 | 2.3 Million |
| New Positions | 19 | 1.95 Million |
| Sold Out Positions | 12 | 2.1 Million |
A total of 57 institutions increased their holdings as of the end of the year, purchasing approximately 6.4 Million shares. In fact of the top 4 holders, which all hold shares in excess of 1 million, increased their already large position by an average 42%. The largest institutional shareholder being Archon Capital Management, that increased its stake by almost 50%, now holds 4,589,307 shares of Glu. These figures compare to only 23 institutions that decreased their holdings, and a mere 12 that sold out entirely, while 19 institutions initiated a new position in Glu Mobile.
What is Glu Mobile Really Worth?
I have laid out the valuations of the recently announced acquisitions of WhatsApp and Natural Motion below. I used each company's 2014 revenue estimates to calculate the price to revenue multiple. I also calculated the respective value given to each monthly active user in WhatsApp's case, since MAU figures were not provided by Natural Motion, nor disclosed by Zynga when specifically asked.
| Company | MAU | $/MAU | 2014 Rev Est | Multiple | Acq Price |
|---|---|---|---|---|---|
| 450M | $42.22 | $1B | 19 x | $19B | |
| Natural Motion | N/A | N/A | $75M | 7 x | $527M |
The Facebook/WhatsApp acquisition appears to be at an exorbitant multiple yes... (because they can afford and possibly needed to), but I believe the Natural Motion deal to be very representative, if not actually lower than the premium that Glu could command if it is in fact acquired. I will use these figures below to calculate what Glu would be valued at, if it were valued at similar multiples.
Current Valuation Breakdown of Glu Mobile and Zynga
First, let's take a look at the market's current valuations for both Glu and Zynga. These figures show the current market cap and multiple implied based on where shares are trading in respect to 2014 revenues. I have also calculated the average value implied to each monthly active user (MAU) based on current figures. The MAU number is significant because it tends to play a large factor in acquisition price, as acquiring users is becoming increasingly more difficult and costly for companies.
| Company | Mkt Cap | MAU | $/MAU | 2014 Rev (est) | Multiple |
|---|---|---|---|---|---|
| Zynga | $4.1B | 112M | $36.60 | $810 Million | 5 x |
| Glu Mobile | $385M | 56M | $6.87 | $150 Million | 2.5 x |
As you can see, the market current awards Zynga twice the multiple on revenues at 5x vs 2.5x for Glu. Zynga's MAU are also valued at 6x that of Glu's MAU base.
MAU Valuation Method
If we take a stripped down look at Glu based solely on its current monthly active users and negate all of the growing metrics, we come up with the following valuations compared to Zynga's current valuation. We can also calculate the valuation implied by Facebook's acquisition of mobile player WhatsApp. So based on these two companies, Glu's market cap and share price would be:
| Company Comparison | MAU | $/MAU | Mkt Cap (est) | Share Price |
|---|---|---|---|---|
| Glu w/Zynga's Valuation | 56M | $36.60 | $2.05B | $26.28 |
| Glu w/WhatApp's Valuation | 56M | $42.22 | $2.36B | $30.31 |
If Glu's MAUs were valued at the same rate as Zynga's MAUs
56 Million MAU x $36.60/user = $2.05B or $21.11 a share
If Glu's MAUs were valued at the same rate as WhatsApps MAUs
56 Million MAU x $42.22/user = $2.36B or $24.35 a share
Valuation as a Multiple of Projected 2014 Revenues
Using a different metric, I have calculated the fair value price of Glu Mobile based on its peers as an estimate of 2014 Revenues. While I included Zynga, Natural Motion, and What's App for comparison… Natural Motion's figures are likely the best comparison given its business most closely resembles that of Glu, and is closest in actual size.
I also want to point out that Natural Motion was acquired by a competitor, which is important in and of itself, as it signals the anticipated consolidation in the mobile gaming sector. Scale has proven to be a key driver of success in mobile gaming, as the largest companies continue to top the charts and take an increasingly larger piece of the revenue pie. Given Glu's small size and recent profitability, I suspect it will be one of the next in line to be acquired, as there are very few other players in mobile with the capabilities, partnerships, user base, and experience that Glu has.
So calculating these figures can help give an estimate of a possible acquisition price based on Glu's current metrics.
| Company Comparison | Glu's 2014 Rev (est) | Rev Multiple (of other co) | Mkt Cap (New) | Share Price |
|---|---|---|---|---|
| Glu/Zynga | $150M | 5x | $750M | $9.62 |
| Glu/Natural Motion | $150M | 7x | $1.05B | $13.46 |
| Glu/WhatsApp | $150M | 19x | $2.85B | $36.54 |
(Math Explained)
Glu/Zynga: $150 Million x 5 = $750 Million or $9.62 a share
Glu/Natural Motion: $150 Million x 7 = $1,050,000,000 or $13.46 a share
Glu/What's App: $150 Million x 19 = $2,850,000,000 or $36.54 a share
By removing What's App from the equation entirely and simply averaging the implied valuations based on Zynga and Natural Motion, we are able to come up with an average estimated fair value price of $14.73 for shares of Glu Mobile.
Conclusion
Glu has experienced its share of struggles, but these figures tell me that the company is likely very undervalued currently. While the market may continue to undervalue the company for a long time to come… the turn around experienced in the 4th quarter gives me some pretty strong conviction that the company's valuation could recover to fair value sooner rather than later.
While this article is based on my own opinion, I encourage you to take a closer look at this small cap company in an exploding industry... as I anticipate it will create some serious returns for investors in the near term.
Disclosure: I am long GLUU, ZNGA, AAPL. 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.
