Glu Mobile Outperforms Zynga In 3 Key Growth Metrics

May. 7.12 | About: Glu Mobile (GLUU)

In the fast-growing world of gaming, lots of companies are talking about their need to grow mobile access to their games. After all, according to estimates by Cicso (NASDAQ:CSCO), there will be more smartphones and tablets in the world than human beings by 2016 (10 billion devices vs. 7.3 billion humans). And Facebook is finding that "nearly half of the company's monthly visitors are accessing the site on a mobile device."

You can clearly see many companies with weakness in mobile gaming rushing to acquire companies with mobile strength to capitalize on this amazing secular growth trend. Just last week, Japan-based gaming giant GREE acquired Funzio for $210 billion to enhance its mobile gaming portfolio in the U.S. And in March, Zynga (NASDAQ:ZNGA) purchased OMGPOP for $200 billion to also beef up its mobile game offerings.

So for investors who are anxious to add exposure to one of the largest secular growth trends in the economy over the next four years, where should they look? Some would argue that you should invest in one of the $1 billion-plus market cap titans in this sector mentioned above (Zynga, GREE, or Facebook). But I am picking the company that is the only pure play in mobile, freemium gaming and the one that just so happens to be the fastest growing relative to its peers in many metrics.

Glu Mobile (NASDAQ:GLUU) is a leading global developer and publisher of freemium games for smartphone and tablet devices for a wide range of platforms including iOS, Android, Windows Phone, Google Chrome and Mac OS. Glu is headquartered in San Francisco and has an international reach with major offices overseas in Brazil, Canada, China and Russia.

After Glu reported its Street beating Q1 2012 revenue growth last week, it is becoming very apparent that the company can double revenue again in the next year. In addition, it can also provide investors an attractive, higher growth alternative to a company like Zynga in the key area of smartphone revenue growth, user monetization, and daily active users.

Revenue Growth

First, let's look at how Glu's smartphone revenue growth and guidance (this is revenue gained from in-app purchases, non-incented ads, and offers and incented ads within Glu's games):

Glu Mobile Smartphone Revenue Growth
2011 2012 Year/Year
Q1 $6.7 million $17.4 million 158%
Q2 $9.7 million $18.5 million* 101%
Q3 $10.5 million
Q4 $15 million
Full Year $41.9 million $80 million* 90%
*Glu Guidance (as of 5/2/12)
Click to enlarge

Glu's 158% year-over-year Q1 2012 smartphone revenue growth is nearly five times the rate of the 32% revenue growth that Zynga reported just a week ago.

Glu has been able to achieve its sixth consecutive quarter of tremendous smartphone revenue growth because of the success of its games in monetizing its users, and in the popularity of its quality game titles.

User Monetization

In the key metric area of average revenue per daily active user (ARPDAU), Glu is also monetizing its users at a five times greater rate than Zynga. According to Glu CEO Nicccolo De Masi's comments during last week's earnings call, "research on April 9, 2012, estimates ARPDAU from Zynga mobile titles such as 'Words With Friends' and 'Draw Something' at approximately $0.01. Glu's games, by comparison, deliver ARPDAU that is approximately five times this figure." Glu's average ARPDAU during March 2012 was $0.055, with popular game "Gun Bros" leading the way with ARPDAU of $0.067.

In a recently queried listing of the top grossing titles in the Google Play store, Glu has more games in the top 100 than any other public company -- except for Zynga.

Google Play (Top Grossing Titles)
Top 50 Top 100
Glu Mobile 4 9
Zynga 6 9
Dena 3 6
Gamevil 2 3
Disney 0 1
Electronic Arts 1 1
Capcom 0 0
Gree 0 1
*U.S. Google Play (as of 4/27/12)
Click to enlarge

Glu is able to stay at the top of the charts because of the volume of the games it releases compared to its peers. Glu will release 23 games in 2012. This is dramatically higher than the three games released by GREE's recently acquired Funzio and the one-hit game of Zynga's recently acquired OMGPOP, "Draw Something." As Glu CEO DeMassi put it in a recent interview: "OMGPOP and Funzio are one-, two-, or three-trick ponies, if you want to call them that. We're much more sustainable. We've proved that scale works."

Daily Active Users

Finally, in the area of installations and daily active users (DAU), Glu is showing dramatic growth in users of its games:

Glu Mobile User Metrics
Installs (Cumulative) Daily Active Users (DAU)
Q1 2011 70,174,000 953,000
Q2 2011 101,934,000 1,639,000
Q3 2011 131,320,000 2,103,000
Q4 2011 176,054,000 2,873,000
Q1 2012 231,063,000 3,218,000
Click to enlarge

The DAU metric illustrates the most dramatic growth superiority that Glu has over Zynga. In a Q1 year-over-year comparison, Glu has grown its daily active users by 336% compared to Zynga's meager 6%:

Glu vs. Zynga (DAU Growth Y/Y)
Q1 2011 Q1 2012 Y/Y Qtr. Growth
Glu Mobile 953,000 3,218,000 336%
Zynga 62,000,000 65,000,000 6%
Click to enlarge

In all three areas of comparison, it is very clear that Glu Mobile is the growth leader by a wide margin when looked at next to its larger, more developed peer Zynga. In this race to design compelling games to capture the greatest number of revenue producing users, I am picking the fastest -- not the largest -- as my No. 1 pick to win this investment gain race for 2012.

With Glu's unwarranted share price decline (along with the broader markets) on Friday to $4.19, the market cap is now only $268 million. This is only half the value of what CEO De Masi would likely sell the company for today. According to a recent interview, when asked about Glu's valuation, De Massi said:

We're a $500 million check. As we keep getting better, we'll continue to get bigger, which will make us harder to buy. But we'll be happy being a $1 billion market cap company.

This is a very likely scenario in the months ahead based on Glu's current profile as the fastest growing mobile gaming company in the hottest secular growth area of technology, mobile computing.

Disclosure: I am long GLUU.