Mobile gaming is stunningly large. It would have been great to invest in King Digital (BATS:KING) two years ago, when revenues were just $100M. Now, standing at $2B in revenue with a $5.4B market capitalization, not so much.
But our attention was drawn to Glu Mobile (NASDAQ:GLUU), which is focused on the same space, but much smaller. Arguably, Glu now has a better revenue mix and lower-risk strategy then King. Glu now has three successful games comprising the bulk of revenue, rather than just one.
The stock had performed well up until the less-than-spectacular KING IPO and subsequent sharp decline in most technology and internet stocks. The "round trip" from $4 to $6 and then back to $4 on a KING IPO yawn was market noise. In the absence of the KING hype, the shares of GLUU would probably have simply continued their measured rise to the $5 range.
This earnings report and commentary should set the stock up to move back to being valued on what are improving fundamentals.
We can break down the new information from the call into the following pluses and minuses:
- POS: Results for March were excellent. They showed a "fatter tail" to leading games like Deer Hunter and Eternity Warriors. Suggests that long-term growth will continue to improve.
- POS: Acquisition of PlayFirst adds a franchise that generated $11M in revenues in 2013, but in decline. However, a refresh and release of a known game (750M downloads) will get revenues growing again from their current run rate of $7M. The purchase price should be very accretive.
- POS: New releases like Dino Hunter and new projects announced for a James Bond game and tapping the mobile market in Japan are promising.
- NEG: Q2 ending June will be the "nadir" of the year given the current release schedule and declines in existing games. Probably conservative guidance, but it should also dampen some short-term investor enthusiasm to go out and buy the stock now.
- NEG: A shelf registration generates uncertainty about further acquisitions and/or dilution from additional external capital. The PlayFirst acquisition terms demonstrate management acumen, but the track record isn't yet well-established.
For long-term investors, the current risk/reward of GLUU shares looks favorable. The company has upgraded management, and is taking a thoughtful and responsible approach to developing games and the company. There are other ways to play the space like KING or older companies like Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI), but these all already have market values from $5B to $14B.
Disclosure: I am long GLUU. 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.