Glu Mobile Is Now The Biggest Acquisition Target In The Gaming Market

Mar.27.12 | About: Glu Mobile (GLUU)

Shares of Glu Mobile (NASDAQ:GLUU) ended Friday trading at $4.85. For the day, the shares were up 21% and one of the best performing stocks on that day. Shares were traded higher thanks to Zynga's buyout of OMGPOP. Interestingly enough, Needham downgraded shares of Zynga after the acquisition and upgraded shares of Glu Mobile to buy with a price target of $8. I wrote an article about how I believed the OMGPOP acquisition was beneficial to Zynga and discussed how more information was needed to see if Glu was worth buying as an acquisition target. Today we take a look at Glu Mobile.

Company

Glu Mobile operates as a gaming company in the mobile field providing cell phone and tablet owners with games that are available for free or on a pay to download basis.

There are currently 56 games listed on Glu Mobile's website. The ones released in 2012 include:

  • Rogue Racing
  • Small Street
  • Samurai vs. Zombies

Glu Mobile does license several gaming entities from Activision (NASDAQ:ATVI) including Call of Duty and Guitar Hero.

Glu Mobile enjoys favorable relations with several gaming platform companies including Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL).

Google's Android platform enjoyed its 10 billionth downloaded application in December and selected Glu Mobile to participate in the celebration. Ten applications were discounted down to $0.10 for 10 days and Glu Mobile selected "Deer Hunter 3D" and "Super KO Boxing 2" to be included in the discounted download program. Glu Mobile also utilizes Google's social platform, known as Google Plus, as a way to market its games to users. "Bug Village" was offered on Google+ for gamers to use the social platform to play the game. I wrote back in December about how Google+ could begin luring gaming companies into using its platform rather than Facebook's (NASDAQ:FB) due to a more reasonable revenue sharing model (See article). Glu Mobile actually ranked ahead of Zynga (NASDAQ:ZNGA), as of 3/5/12, on the Android platform. Glu Mobile had six Top 50 grossing games and nine in the Top 100, compared with Zynga's three and four respectively.

In November and December, Glu Mobile also began offering games on Amazon's Kindle Fire. At the time the company offered games including "Bug Village" and "Eternity Warriors." Since that time, the majority of Glu Mobile's games have been added to the library of downloadable apps on the Kindle.

Glu Mobile consistently is among Apple's top free and paid games for months of release and for the entire year. The ability to have games on iPhones and iPads helps to further the number of Glu Mobile downloads.

Glu Mobile's ability to use multiple platforms to sell its products has helped the company come close to profitability. As the continued dominance of smartphones expands in the United States and other markets, Glu Mobile is a clear beneficiary. Selling games for $0.99 doesn't seem like a profitable venture but when done with the company's scale and across several platforms, it turns into millions of dollars.

Valuation

Glu Mobile has a market capitalization of $293 million as of the end of Monday's trading sessions. The company also has $32 million in cash with zero long-term debt on the books.

Earnings

The current quarter has analysts' predicting a loss of $.08 per share. For the fiscal year, analysts see a loss of $0.18. In 2013, Glu Mobile is expected to show a profit of $0.18 per share and investors should be rewarded for sticking with the company before it turned a profit. Glu Mobile has a history of beating analysts' earnings estimates as shown below.

Earnings 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Estimate -$0.07 -$0.04 -$0.12 -$0.10
Actual -$0.02 -$0.01 -$0.02 -$0.02
Beat 71% 75% 83% 80%
Click to enlarge

As you can see from the chart, Glu Mobile has beat expectations each of the quarters during 2011. The company ended with a loss of $0.07 per share for 2011. If you add up the expected quarterly losses, analysts expected a loss of $0.33 for the fiscal year. If Glu Mobile can keep up the earnings momentum, it could actually turn a profit in 2012, which could make shares surge earlier than expected.

At the recent Roth Conference (3/14/12), Glu Mobile broke down revenue:

  • Microtransactions 75%
  • Display Ads 5%
  • Incented Ads 20%

Analyst Coverage

As mentioned above, shares of Glu Mobile were upgraded to buy with a price target of $8 by Needham. On Thursday, Canaccord Genuity reaffirmed a buy rating on shares of Glu Mobile as well. Canaccord has a more bullish $10 price target on shares. Some of the reasons Canaccord is so bullish include:

  • In early stages of turnaround
  • Keeps more revenue in house
  • $0.33 in 2014 earnings predicted

With analysts constantly looking for buyout targets and picking hot M&A trends, it is highly likely that shares of Glu Mobile will see another upgrade or two soon.

Recommendation

While digging through earnings reports and presentations at investor conferences, I found a company that is on the verge of profitability and has a winning business model. The company has made smart acquisitions and has put its talents to use by creating the most in depth free games offered on many gaming platforms. The company offers the majority of its games for free and relies on in game revenue and ad sales for revenue. This model has appealed to other companies, which would attract a buyout of a large company that could integrate Glu Mobile's games.

Even with Friday's run-up, shares are trading below their 52-week high of $6.10. Shares actually touched $13.95 in 2007, and would likely need a buyout to hit that price any time soon. I think that Glu Mobile turns a profit this year with an earnings beat in the first quarter and improved guidance for the rest of the year. A profit takes shares to a new 52-week high of $7.50 by December. I think the odds of a buyout in 2012 are 50% or higher at this point. Take a look at shares and buy on dips.

Disclosure: I am long shares of Activision and may buy shares of Glu Mobile over the next 72 hours.