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Summary

  • Zynga and King Digital are proving to be increasingly dull investments in the mobile app space.
  • Game developments by Glu Mobile and Q2 Earnings announcement on July 30, 2014 could push its valuation into the vicinity of peer companies King Digital and Zynga.
  • Mirroring Glu Mobile’s strategy along with approaching near term catalysts could present upside for GlassesOff.

As the evolution of the smartphone has earned its place in the consumer's life, the respective mobile applications have consequently become just as integral. According to Markets and Markets Research, the World Mobile Applications Market will be worth $25B by next year. In particular, games applications have expanded their outreach beyond conventional gaming platforms. Mobile application developers can develop and market even the simplest of games to a large market of users with minimal barrier to entry. As such, this has made the app space a popular breeding ground for viral growth. This type of growth has been the driving force behind the staggering valuations and blockbuster buyouts. With that in mind, the sustenance of this growth will be the key factor in picking ripening investments in this space. In my opinion, Glu Mobile (NASDAQ:GLUU) and GlassesOff (OTCQB:GLSO) offer more upside than industry leaders King Digital (NYSE:KING) and Zynga (NASDAQ:ZNGA).

Recently Glu Mobile's stock has been performing well from the reception of its most recent app Kim Kardashian: Hollywood. The company seems to have found the recipe for bringing high margins on its product. The re-use of Stardom: Hollywood's engine (by GLUU as well) coupled with clever marketing has resulted in high revenue at significantly lower development costs. According to Bloomberg, the game is set to rake in $200M, roughly a third of the company's net valuation. While the bear might regard the app's success as a short-term gain, the concept has created a niche in its user community consisting of mostly 12-16 year old girls.

This means that repeat successes are more than plausible by subsequently re-inventing the game under the same franchise, as it has been the case with many other games such as the Grand Theft Auto or FIFA series. Moreover, one might argue that the app's popularity is highly dependent on the media's marketing of its figurehead, in this case Kim Kardashian. Looking at the difference in performance between the Stardom: Hollywood and Kim Kardashian: Hollywood app, they would be absolutely correct. That being said, subsequent games in keeping with the future trends of mainstream media and their celebrities would enjoy the same popularity. Therefore, in my opinion GLUU could still see more upside from the franchising of their games, much like the successful Sims series, which carries a similar style game play. A major upcoming catalyst for GLUU is the reporting of earnings for the Q2 on July 30th, 2014.

Furthermore revenue from the Kim Kardashian: Hollywood app would enable the company to broaden its developments. This would make the company's overall performance inelastic to the success or failure of any one its apps. This seems to be a developing theme among mobile tech companies, best exemplified by the pressure for giant King Mobile to decouple its performance from its hit app Candy Crush Saga. The company has since developed a system for streamlining the process of bringing a game from conception to market. A key part of this is the company's ability to rapidly create simple prototypes for user evaluation prior to a full blown investment in the project. This has led the company to have 3 of the top 10 titles on each mobile platform. Whether or not this justifies the $5.9B market cap remains to be seen; it does however solidify the business model.

From an investor's perspective, King's boat has set sail, so to speak. In fact, the lock-up for insider's shares from the company's IPO expire in September. If precedence carries any weight here, and I believe it does, the company's share price will be negatively impacted. Twitter (NYSE:TWTR) and Groupon (NASDAQ:GRPN) are examples of companies whose stock saw downside following the expiration of the lockup period. In Twitter's case, its stock took an 18% hit, reducing its market value by $4B. This does not guarantee that King's shares will trade lower come September, but the looming fear of insider shares flooding the marketplace makes taking a position less than compelling.

Zynga's transition into mobile applications is another example of the necessary diversification in the industry. Earlier this year, Zynga acquired mobile game developer NaturalMotion for $527M. CEO Don Mattrick best explains the nature of the deal:

Our acquisition of NaturalMotion will allow us to significantly expand our creative pipeline, accelerate our mobile growth and bring next-generation technology and tools to Zynga that we believe will fast track our ability to deliver more hit games...

Using the company's stock chart as a baseline, it seems the acquisition is not translating into performance. The stock has been on a steady decline since the stock hit an all-time high earlier this year from news of a dismissed fraudulent lawsuit.

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In my opinion, taking a position in Zynga and King would be ill-advised, as I believe most of their upside has been realized. I do believe that this ongoing pressure to produce quality products will result in a favorable breeding ground for smaller mobile app companies as the market continues to consolidate, enabling for a higher throughput and consequently higher revenue. Whether it is through partnerships or acquisition, the sharing of resources opens up space for rapid development. I believe that GlassesOff will greatly benefit from the possibility coalescing resources with another firm as it brings an extensive intellectual property portfolio and a series of potential mobile apps to targeted user categories.

Since GlassesOff is not nearly as mainstream as the companies I have just discussed, a bit of background is necessary to understand the potential upside that the app brings. GlassesOff is a mobile app company whose lead game app, "is designed to improve the near sight vision of its users or presbyopes." Upon completion of the app, users, as the name suggests, should not require the use of reading glasses. For those wondering how an app can compensate for the shortcomings of the eyes optics, refer to this article which elaborates on the science. The claims are backed by studies from UC Berkeley published in Nature magazine that support the efficacy of the app, the study can be found here. The study assessed the effects of perceptual training, the apps mechanism, on the performance of the human eye. According to the company website, all participants who could not read standard size newspaper fonts without the help of their reading glasses were able to read freely after the GlassesOff program. I would advise any investors to further look into the science also available on the company website.

To fully illustrate the investment potential and trajectory of the company, we will have to refer to the company's investor presentation from May that can be found here. I will point out parts as I find relevant, but still encourage prospective investors to go through it in its entirety. During the time of the presentation, the company had done a soft launch of the app on the iOS [Apple (NASDAQ:AAPL) Devices] platform and reported sales of $28 000, hardly indicative of a company at a $60M market cap. That being said, this should not be taken as an indicator of potential sales, as the soft launch isn't meant to draw a great deal of attention to the product. Since then, the company has most recently released a version for the android platform giving access to 80% of smartphone market share as well as updated versions on the iOS platform. This additional revenue stream should manifest itself as an increase in revenue on the company's next quarterly report.

Most importantly from the company's investor presentation was the additional applications in the pipeline and its go-to-market strategy, both slides can be seen below. Taking a page from GLUU's playbook, the company suggests that the same technology in the current app can be offered to the general population by improvement of visual function in other areas. In 2015, the company hopes to offer a sports app as well as a reading speed and quality app. The company hopes to offer a driving app in 2016. In order to keep up with their set out time frame, I'd imagine that the company is currently pursuing a partnership to develop faster and better quality apps. This is consistent with what they have already outlined in the scale up slide below. Within the same slide, the company also mentions its marketing plans. The most important of which is the company's plan to create outreach using celebrity endorsements. If what Kim Kardashian did for Glu is any indicator of what could come for Glassesoff, investors should be excited. The partnership will also prove essential in consolidating the companies' resources and focus on the timely releasing of subsequent apps so as to capitalize on the attention created by the upcoming marketing campaign. These upcoming catalysts will likely drive performance in the near term.

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There are,however, risks associated. The first of which is the possibility that the app is ineffective in the majority of users. For cynics who question the efficacy despite the studies, I would like draw them to the numerous "brain games" that have been successful in the marketplace. Most notably the Brain Age series from Nintendo has seen sales hit 19M copies worldwide as of march 31, 2014, while still having questionable scientific efficacy. This further stresses the importance of a good partnership in being able to produce a portfolio of fun games with GlassessOff's proven technology.

There is still the unlikely possibility of major dilutive financing that would impact the company's performance negatively. The seems unlikely, considering the company's press release announced its securing of a $15M equity financing facility as it needs. Another de-risking event is the insider participation in the last round financing from the company's Chairman, Shai Novik, and Vice-Chairman, Sasson Darwish. The two invested under the same terms as other investors.

The main risk with this investment is trading volume as the stock (currently) trades OTC with an average volume of 23K over the last three months. That said, it appears that the Company may qualify for a senior listing (NYSE MKT or NASDAQ) before year-end, and this risk may prove immaterial.

In conclusion. GLUU Mobile should see significant upside in the near term from the announcement of its Q2 earnings given the recent performance of its Kim Kardashian: Hollywood. The possibility of franchising the app coupled with its current valuation makes it a compelling long hold. Mirroring a similar strategy as GLUU, GlassesOff should see near term catalysts from the launch of their celebrity marketing campaign and partnering. Zynga's and King Digital's investors may want to pay attention to these two names, in particular.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Drop Zynga, Buy Glu And Some GlassesOff Too