- Past weaknesses in Glu Mobile were opportunities to buy.
- Dips caused by stock offerings should be embraced.
- Initial success of "Tap Sports Baseball" provides another surprise catalyst.
It's never exciting to wake up and see your stock investment down 10% for the day. Lots of negative reasons exist to cause a major drop in a stock price, but one particular reason offers some upside potential. In the case of especially small cap growth stocks, a secondary stock offering to raise capital for growth opportunities is typically worth embracing. This article will review the situation of a favorite stock to highlight how investors should handle a similar occurrence in the future, while providing some guidance of what to do with the stock now following another dip.
In the case of Glu Mobile, Inc (NASDAQ:GLUU), the mobile game developer had plenty of uses for the cash raised in the May secondary including growing the successful strategy of expanding old franchises. The most successful franchise was purchased for a song several years back and the company recently closed another deal for a popular game franchise that could use a face lift, but most importantly Glu Mobile has the brand recognition to rise to the top in the crowded mobile game world.
The secondary does bring to light the importance of reviewing the balance sheet before investing in a stock. While Glu Mobile wasn't in a bad position, it didn't have a lot of financial flexibility with a relatively small cash balance and mighty aspirations. With Zynga (NASDAQ:ZNGA) still flush with cash after the IPO years back and King Digital Entertainment (NYSE:KING) loaded with recent IPO cash, those investors don't face the same capital raising concern. Though conversely, the fear in these cases is that any extra cash is wasted on a bad acquisition or worse slowly blown on overpaying management and the development of unprofitable games.
Not So Attractive Pricing
After Glu Mobile appeared attractive trading around $4 back in May, it was naturally frustrating to see the company price an offering on May 30 at $3.50. After all, the price was 16% below the closing price prior to the deal announcement. Investors though can't focus on the pricing, but rather what the deal offers them going forward.
The deal was for 8.6 million shares for net proceeds of $27.8 million and an option for another 1.3 million shares that provided another $4 million to the coffers. The company only had $37 million of cash on the books and 81 million shares outstanding so the deal helped boost the financial flexibility while not greatly impacting or diluting existing shareholders.
Last year, the company sold 7.2 million shares in a stock offering at $2.10 to raise $14 million. The stock quickly rose to over $4 in less than two months and eventually surpassed $5.50 in roughly six months. Investors should've used this past example to guide them back in early June.
Now the stock is providing investors with another opportunity to load up on it. Shortly after the secondary, the successful release of Kim Kardashian: Hollywood sent the stock surging over the next month. Some disappointing margin guidance for Q314 has the stock back down to the low $5s providing another buy point, especially considering the Kardashian game is a massive success and the recently released Tap Sports Baseball is climbing the download charts already listed in the top 5 on the iPhone.
Typical of a secondary, Glu Mobile wasn't specific on the use of the cash other than for working capital and acquisition of companies or technologies. The company recently closed on the PlayFirst deal where it spent three million shares to obtain a company with the DASH series that in aggregate had games downloaded 750 million times across all platforms over the past 10 years. With the recent success of turning the old Deer Hunter franchise into a big hit, the company clearly had a strategy that pays off.
At the same time as releasing Q214 earnings, the company announced the purchase of Cie Games for $100 million. The deal brings the company the #1 racing game in Rivals Racing. Glu Mobile will pay $30 million in cash and roughly $70 million in stock for the deal that will become immediately accretive to EBITDA. Interestingly, the cash portion of the deal amounts proportionally to the cash raised in the May secondary.
The cash raised and deal size pales in comparison to fellow mobile and social game rival Zynga that recently spent over $430 million to acquire the technology and games of Natural Motion. The game developer still sits on $1.1 billion in cash providing the different issue for shareholders of whether the company will waster the stash that accounts for 40% of the market valuation.
The best part about a secondary in a growth stock is that it typically deflates the stock price while at the same time padding the balance sheet with cash. New investors get the opportunity to enter the stock at an artificial low with the extra security blanket of a balance sheet loaded with cash. In this case, investors had the added proof of the process working in the past and a prime example of how the company can use a small amount of cash to turn a distinguishable game franchise into a mobile winner.
The recent secondary by Glu Mobile was undoubtedly frustrating to existing investors at the time, but anybody paying attention to the balance sheet knew the possibility might exist. As with Zynga and its large cash hoard, it's really what the company does with the cash that matters as much as how it was obtained. Glu Mobile has a history of utilizing the cash cushion to further the company and investors should opportunistically take advantage of the current and future dips in the stock.
Use the recent weakness in Glu Mobile to embrace the stock as it continues to create top downloaded games.
Disclosure: The author is long GLUU, ZNGA. 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 information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.