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Reasons Glu Mobile (NASDAQ:GLUU) may be overvalued at $5.59/share:

  1. There were rumors of a buyout by Microsoft Corporation (NASDAQ:MSFT) and Zynga, Inc (NASDAQ:ZNGA). These buyouts have not materialized.

  2. Glu has been historically unprofitable, with inconsistent revenues. For the last 5 years, revenue has gone up and down. What has been consistent is that the company has lost money every year.

    (click to enlarge)
  1. 2013 estimates range from .05c/share to .27c/share with an average of .16c/ share.

  2. Expenses are going to be higher this year due to the acquisitions of Blammo and Griptonite:

    In addition, our costs have increased significantly as a result of our acquisitions of Blammo and Griptonite due to the addition of nearly 200 employees and independent contractors.... The integration of Griptonite has been, and may continue to prove to be, particularly challenging due to its size, as Griptonite has nearly 200 employees and independent contractors compared with approximately 400 employees at Glu prior to the Blammo and Griptonite acquisitions, as well as the fact that Griptonite has historically built premium games on a work-for-hire basis for non-smartphone platforms such as Microsoft's Xbox 360, Nintendo's Wii, Nintendo's DS and Sony's PSP.

  3. The Freemium model is difficult to monetize. From a CNBC interview with CEO Nicolo De Masi:

Our sole job really comes down to producing experiences which are so compelling that we get consumers to effectively give us their time, stay with the game.

In response to a question of what percentage of users actually spend money De Masi said:

Very similar numbers to Zynga. About 2, 2.2%. We haven't disclosed publicly an average number.

Translation: About 97, 98% of users do not ever spend any money on Glu's games. Could be more, could be less.

A comparison to Zynga isn't exactly great. Zynga had negative earnings last year and in the last quarter, and has absolutely been crushed recently.

  1. 6 more risks:

    We have encountered difficulties in retaining users of our games for any significant length of time after they initially download our games and only a small percentage of users ever purchase virtual currency in our games, and these factors have combined to suppress the overall average lifetime value of our users; (2 the open nature of many of the smartphone and tablet storefronts substantially increases the number of competitive products and competitors to produce them, many of which may devote large marketing budgets to promoting their titles reducing the likelihood of consumer discovery of our titles; (3 we have only relatively recently concentrated our efforts on developing and marketing social, freemium games; (4) our relatively limited experience creating games that include micro-transaction capabilities, advertising and offers has caused us, and may continue to cause us to have, difficulty optimizing the monetization of our social, freemium games; (5) we historically have had more limited success in generating significant revenues from games based on our own intellectual property rather than licensed brands; and (6) our social, freemium games may not be widely downloaded by consumers for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts, a failure to achieve prominent storefront featuring for such games or as a result of the large file sizes of many of our games.

Conclusion: I never like to chase buyout rumors. Without a buyout, Glu has a long way to go to start making money and justifying its $360 million market cap. With EPS next year that is estimated to be around .15c/share, this stock has a lot of room to fall. A P/E in the teens (let's say 15) would price Glu at $2.25/ share, a steep drop from $5.59. The 52 week low is $1.80/share.

Quotes taken from 2011 Annual Report.

Source: Glu Mobile Appears Overvalued