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Summary

  • Glu Mobile's stock may be on track to soar, but much of the good news may already be baked in. Kim Kardashian: Hollywood is key.
  • King Digital has a track record of 3 hit games and a possible fourth. Solidly profitable and the lowest priced of the 3 stocks.
  • Zynga is the most speculative play. Buying it is a vote of confidence in CEO Don Mattrick and its acquisition of NaturalMotion.

The game industry is a hit-driven business. Those companies whose games have relatively short lifetimes on the top-grossing lists have to introduce new games more often to maintain their revenue streams. This increases their operating costs because they must have larger R&D groups, reducing profitability.

This article looks at the games offered by three game firms whose stocks have been active recently: Glu Mobile, Inc. (NASDAQ:GLUU), King Digital Entertainment PLC (NYSE:KING) and Zynga, Inc. (NASDAQ:ZNGA). It considers the performance of their top-earning games this year, R&D expenses as a percentage of sales, operating margins, prospects and relative valuations to help you decide which may be right for your portfolio.

The Games of Glu Mobile

Glu Mobile's current top 3 titles based on their US sales are: 2014 Deer Hunter, Kim Kardashian: Hollywood, and Dino Hunter: Deadly Shores. The following table shows the performance of Glu's games on both the Android and iOS platforms. Days Since Released is as of July 22, 2014.

2014 US Grossing Ranks of Glu Mobile's Games

Store/Device

Game

Jan 1

Mar 31

Jun 30

July 22

Days Since Released

Release Date

Google Play

Deer Hunter

13

26

41

42

297

9/28/13

 

Kim Kardashian

  

55

12

25

6/27/14

 

Dino Hunter

   

42

10

7/12/14

Apple iPhone

Deer Hunter

11

14

45

41

306

9/19/13

 

Kim Kardashian

  

4

4

26

6/26/14

 

Dino Hunter

   

43

11

7/11/14

Apple iPad

Deer Hunter

18

19

55

65

306

9/19/13

 

Kim Kardashian

  

28

15

26

6/26/14

 

Dino Hunter

   

51

11

7/11/14

Source: Distimo

Deer Hunter began slipping on Google Play during the first quarter. Its sales rank fell on all devices during the second quarter. Kim Kardashian was released late in Q2 so its sales contribution may not make up for Deer Hunter's decline in Q2. Moreover, while it climbed into the top 5 grossing in less than a week on the iPhone, it has been less successful on Google Play and the iPad.

While Kim Kardashian and Dino Hunter could be hits, it is too early to tell. Kim Kardashian looks promising.

For our purposes, a hit is a title which remains in the top 10 grossing on at least one platform for 6 months or more. Popularity as measured by a game's free download rank makes good headlines, but it is only valuable to the firm if it is monetized (or prompts an attractive takeover offer). That's why the focus is on grossing ranks and not downloads.

While Deer Hunter was not a hit, it held up fairly well, staying in the top 20 grossing games on both Apple devices through Q1 2014.

The Games of King Digital

King's top 4 US grossing titles are: Candy Crush Saga, Pet Rescue Saga, Farm Heroes Saga and Bubble Witch Saga 2. The following table shows the performance of King's games on both the Android and iOS platforms.

2014 US Grossing Ranks of King Digital's Games

Store/Device

Game

Jan 1

Mar 31

Jun 30

July 22

Days Since Released

Release Date

Google Play

Candy Crush

1

2

2

2

607

11/22/12

 

Pet Rescue

4

5

5

6

401

6/16/13

 

Farm Heroes

 

3

3

3

198

1/5/14

 

Bubble Witch 2

  

12

7

45

6/7/14

Apple iPhone

Candy Crush

1

2

2

2

613

11/16/12

 

Pet Rescue

10

8

9

10

403

6/14/13

 

Farm Heroes

 

4

5

6

199

1/4/14

 

Bubble Witch 2

  

21

11

46

6/6/14

Apple iPad

Candy Crush

1

2

2

2

614

11/15/12

 

Pet Rescue

10

10

10

12

403

6/15/13

 

Farm Heroes

 

4

5

6

199

1/4/14

 

Bubble Witch 2

  

16

10

47

6/5/14

Source: Distimo

Candy Crush, Pet Rescue and Farm Heroes were and still are hits. They were released about 6-7 months apart. The jury is still out on Bubble Witch 2, but it looks promising. It currently outranks Kim Kardashian on both Google Play and the Apple iPad.

The Games of Zynga

Zynga's current top 3 grossing games are: Zynga Poker, Hit It Rich! Free Casino Slots and FarmVille 2. The following table shows the performance of Zynga's games on both the Android and iOS platforms.

2014 US Grossing Ranks of Zynga's Games

Store/Device

Game

Jan 1

Mar 31

Jun 30

July 22

Days Since Released

Release Date

Google Play

Zynga Poker

38

34

43

47

1068

8/19/11

 

Hit It Rich! Slots

  

51

36

68

5/15/14

 

FarmVille 2

  

11

11

94

4/19/14

Apple iPhone

Zynga Poker

23

23

26

23

1526

5/18/10

 

Hit It Rich! Slots

 

76

51

50

129

3/15/14

 

FarmVille 2

  

15

30

95

4/18/14

Apple iPad

Zynga Poker

50

54

45

47

1492

6/21/10

 

Hit It Rich! Slots

43

24

26

25

222

12/12/13

 

FarmVille 2

  

8

21

95

4/18/14

Source: Distimo

Zynga Poker was a hit, being in the top 10 grossing on Google Play for over 15 months between 2011 and 2012. It is too early to say for the other 2 games.

While FarmVille 2 has held up well on Google Play, its earning power slipped rather quickly on Apple's devices.

Sales and Profitability

Not surprisingly, King with the most hits and most games in the top 10 grossing in Q1 posted the highest revenue.

Firm

Q1 2014 Sales in Millions

Operating Margin

R&D as % of Sales

Glu Mobile

$ 44.6

1.3%

34.0%

King Digital

$ 606.7

26.6%

7.7%

Zynga

$ 168.0

-41.8%

58.1%

Source: SEC

The operating margins reported by these 3 firms support the premise that companies that have to introduce games frequently to maintain sales have lower operating margins and higher R&D expenses as a percentage of sales.

Zynga's margin is the worst of the three because it has not had a mobile hit since Zynga Poker and its headcount remains bloated by its 24 acquisitions. Zynga spent a whopping 58.1% of sales on R&D in Q1 vs. just 7.7% for King. Zynga's actual R&D expenses were 109% more than King's: $97.6 million vs. $46.8 million.

Although Deer Hunter was not technically a hit, it did well enough to allow Glu Mobile to post a profit in Q1. However, Glu Mobile's R&D expenses are quite high, being about one-third of King's. To increase its operating margin, Glu will have to significantly trim its R&D expenses to benefit from Kim Kardashian's revenues.

Prospects

Glu Mobile

Kim Kardashian may be the company's first big hit. Cutting operating expenses enough to bring more sales to the bottom line may be challenging given Glu's high R&D expenses. To be more than a speculative play, Glu has to demonstrate that it can generate hits on a regular basis.

King Digital

King has a solid track record of delivering hit games every 6-7 months with 3 in a row and a possible 4th with Bubble Witch 2. The company's most recent operating margin was a very healthy 26.6%. While the past may not predict the future, King has a solid record and all indications of a solid future.

Zynga

As of Q1 2014, the company continued to struggle with slowing sales and its profitability. TTM sales were 39% lower than its 2012 peak and it has not posted a profitable year since 2010. The acquisition of NaturalMotion in January may be the catalyst the company needs to grow sales. CEO Don Mattrick instituted a second round of key management changes in June. It will probably be another couple quarters until we know if these management changes and the acquisition of NaturalMotion have made a difference.

Relative Valuation

Since both Glu Mobile's and Zynga's TTM earnings are negative, P/E couldn't be used to gauge the relative value of these 3 stocks. Instead, Price/TTM Sales was used instead. Prices are as of July 24. Based on their P/S ratios, King's stock is the cheapest and Glu Mobile's, the most expensive.

Company

Share Price

Market Cap in Millions

TTM Sales in Millions

Price/Sales

Glu Mobile

$7.00

$569.2

$125.6

4.53

King Digital

$18.94

$6020

$2285.1

2.63

Zynga

$3.04

$2690

$777.7

3.46

Source: SEC, Yahoo Finance

As the price chart below shows, Glu Mobile's stock has run up a lot over the last 3 months.

(click to enlarge)Source: Yahoo Finance

Bottom Lines

Glu Mobile

Its stock may be on track to soar, but much of the news may already be baked in. Kim Kardashian is key. The most expensive of the 3 stocks.

King Digital

A track record of 3 hits with possibly a 4th on the way. Solidly profitable. The least expensive of the 3 stocks.

Zynga

The most speculative stock of the 3 with declining sales and a history of losses. Buying its stock is a vote of confidence in its CEO and NaturalMotion.

Disclosure: The author is long KING. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is short ZNGA.

Source: 3 Game Companies - Which Is Right For You?