Glu Mobile: Opportunities Abound, Execution Struggles Persist

| About: Glu Mobile (GLUU)

Summary

Glu Mobile easily surpassed Q4 estimates despite the Katy Perry game flopping.

Sustaining games and new investments provide a huge opportunity going forward.

The valuation of the stock is already pricing in further game failures not supported by beta tests.

Glu Mobile's (NASDAQ:GLUU) Q4 earnings release and conference call were filled with unanswered questions and promising opportunities. The most immediate takeaway was that the stock overshot on the pessimism with the drop to $2 and is surging over 30% following the news.

The lingering question is whether the mobile game developer can regain some momentum lost in 2015 when the company generally failed to produce a hit. At $2.60 in mid-day trading, the stock is at the 2013 lows. Can Glu Mobile now really get back to the previous highs of $7?

Unanswered Questions

The biggest unanswered questions center on the failure of the Katy Perry Pop game and the future development of the racing games pushed back due to the company's focus on the celebrity games. The CEO admitted to making a mistake with having the Cie Studios attempt the development of a different genre, but at the same time, the MX Rivals and Car Town Rivals games are no longer listed on the publishing schedule for 2016.

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The additional games listed as possible launches might include these above games or another attempt at a Katy Perry game.

On the flip side, CEO de Masi suggests the partnership with Katy Perry remains strong enough to continue after her game flopped. The suggestion is that the decisions regarding the direction of the game and engineering mistakes led to the stability issues with the game requiring a complete redo. At the same time, no mention of a time line existed for another attempt.

In essence, three games expected to contribute meaningfully to Q1 revenues are now unknown.

Promising Opportunities

The promising opportunities are endless with Glu Mobile, as typical of the CEO who is visionary but lacks execution skills. For shareholders, the key rests with the success of the Kendall & Kylie game launch on February 18. The game has seen initial success in Singapore and Canada that far exceeded the beta tests of Katy Perry Pop and actually matches the numbers from Kim Kardashian: Hollywood.

If the Jenner sisters game fails, the whole promise of the vast majority of the game releases in 2016 could collapse. Other opportunities exist, but the shareholder base could revolt on the CEO.

The other promising opportunities include:

  • Taylor Swift game in December
  • Publishing WeFire game outside Asia during Q2
  • Investment in QuizUp with potential to purchase
  • $50 million stock buyback
  • Sustaining existing hits

The top three opportunities all involve potential home-run games. The lack of execution lately leaves lots of doubts on whether they will occur.

The investment in Plain Vanilla that published QuizUp is the most intriguing with the game already highly successful. The trivia game has 40 million installs and still sits around the top five install positions in the category. For a $7.5 million investment, Glu Mobile has the potential to purchase the company at a fixed cash price that is working with NBC Universal (NASDAQ:CMCSA) on a TV game show based on the mobile game.

Possibly the biggest reason that Glu Mobile is a low-risk investment at these lower stock levels is the revenue sustainability of existing games. The ability to beat Q4 estimates even though Katy Perry flopped is a testament to the changing landscape.

For Q4, the vast majority of revenues came from games published all the way back in 2014 and definitely months prior to the quarter.

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Q4 revenue by year games were published:

  • Pre-2014: $5.8 million
  • 2014: $25.7 million
  • 2015: $25.3 million

According to the slide, Glu produced $57 million in revenues and is still highly reliant on Kim Kardashian: Hollywood and Racing Rivals that combined to produce $21.4 million in revenues.

Based on the sustaining revenues of 2014 games, the forecast for Q1 revenues of $47 million is extremely low. Any revenues from the Kendall & Kylie game will lead to a meaningful outperformance for the quarter.

At an enterprise value of only around $155 million ($180 million in cash), the stock trades at roughly 0.6x the revenue estimates. Even the big rally leaves the stock extremely cheap.

Takeaway

Glu Mobile does itself no favors with tons of execution issues, but the company always finds new opportunities to explore and grow. At the current valuation, the stock is priced for another failed celebrity launch right when the company appears to actually have another hit on the way. Use any dips to continue buying the stock before the Jenner sisters game launches in two weeks.

Disclosure: I am/we are 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.

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.