On-The-Fly And On-The-Sly Gaming With Glu Mobile

Aug.10.12 | About: Glu Mobile (GLUU)

The big hot button issues with mobile gaming company Glu Mobile (NASDAQ:GLUU) are that they are currently unprofitable, and the stock is expensive at $4.85/share. That may be true in the dog days of Summer 2012, but Christmas season is fast approaching, and that is when the company can increase sales. This is because a majority of Glu's user base are male millennials who have not yet cut free from their parents' purse strings. They are dependent on their parents for holiday gifts such as smartphones and tablets, as well as spending money to take advantage of all the accouterments a Glu game has to offer.

Glu Mobile is one of the few, if not the only publicly traded pure play in a boom industry - content creation for the ever expanding smartphone and tablet markets. Glu's tried and true premium smartphone strategy is paying off. Since the company recycled itself with a turnaround plan in January 2010, they have increased smartphone game sales to 85% of revenues in the latest quarter. Their signature style psychotronic titles like Gears & Guts, Mutant Roadkill, Frontline Commando, and Blood & Glory are very popular with young males.

During the Q2 Conference Call, Glu's top dog and rainmaker, Niccolo de Massi, trumpeted their upcoming launches, must-have titles for disenfranchised youth. CEO de Massi points out that the current one billion smartphones and tablets already sold are slated to grow to six billion in the near future. His team should be able to distribute a multitude of games just on sheer industry volume. Although many of these six billion mobile users will be playing Glu's games on-the-fly, my impression is that Glu's overall business strategy is on the sly. This is because they will be slowly working their way into your living room with the advent of smart TVs.

The progression of mobile technology for gaming applications is as such: feature phones to smartphones to tablets, and eventually, to televisions like Apple's (NASDAQ:AAPL) upcoming launch. Smart TVs will allow you to take all of your mobile applications to a larger screen. To the best of my knowledge, this is Apple's plan, and other television manufacturers will probably follow suit if history is any indication. If indeed Glu does begin to penetrate the home, it also means they will be going head to head with industry stalwarts such as Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI).

Recently, Glu took a big step in increasing their competitive edge in not only mobile, but the potentially lucrative home market by acquiring GameSpy Technology from IGN Entertainment, a division of News Corp. (NASDAQ:NWS). In 2004, when IGN Entertainment bought GameSpy, it sold for $55 million. With incredible cash-management skills, Glu Mobile scooped it up for 600,000 shares of stock, worth about $2.8 million, according to Steven Brown of the San Francisco Business Times.

My opinion is that this is a big move for the company. It gives Glu Mobile the option for multiplayer and social functionality in a number of their titles, not just Glu's Gun Bros which currently integrates its features on Android (NASDAQ:GOOG). The company press release states that what the IGN Entertainment technology does is facilitate: " multiplayer matchmaking, player statistics, individual player profiles, in-game buddy lists, leader boards, and storage of game media, including screenshots, gameplay videos, and playable content.".

This is what gamers want, the competitive social interaction that was previously offered on more established legacy gaming systems like Xbox (NASDAQ:MSFT), or on Zynga's (NASDAQ:ZNGA) platform. I also believe it opens the door for Glu Mobile for motion sensor gaming if indeed they do invade your living room like I am speculating. A partner like Majesco Entertainment (NASDAQ:COOL) may be a great fit if the management at Glu is going in that direction. However, this is peering around the corner, what really matters to investors are the numbers.

Let's examine the negative perceptions of the company through the eyes of Wall Street, which are that the company is expensive, and that they are unprofitable. According to the seven analysts that follow the company as reported on Yahoo Finance, Glu Mobile will indeed be profitable next year, but there is a wide discrepancy on the earnings estimates for 2013. The average earnings estimate for next year is $0.16/share, with the low being only $0.05/share, and the high a whopping $0.28/share. Someone may need to recalibrate the numbers, but my bet is that it's going to be the analyst who lowballed the projection.

To give us a ballpark figure for a forward P/E Ratio, I'm going to use the average of $0.16/share. That would calculate to a P/E of 30 for next year. If you are in the bullish camp, and use the highest estimate of $0.28/share, you get a forward P/E Ratio of 17. However, it is important to remember that these prognostications go out 16 months. At its current price, it may be a bit overpriced, and with a Beta of 2.12, it trades in a fairly wide range. Patient investors have a high probability of purchasing Glu at a reduced rate if the market corrects again.

On the growth rate, because earnings are going from negative to positive, it's tough to get a bottom line approximation for the near term. However, over a five year period, Wall Street expects it to be 30% on average. Sales are also expected to grow at a plus 30% clip from this year to next. Being a small company in a sky's-the-limit market, they may very well reach their five year earnings expectations just from the magnitude of smartphone penetration.

For full disclosure, I am long Glu Mobile in my personal portfolio, but also use it as a trade. I recently sold half my stake near the 52 week high of $5.90, then reestablished a larger position around $4.40 in the aftermath of the Q2 Conference Call. Utter coincidence. Dumb luck. Whatever you want to call it. I just thought it was overvalued near $6, and took some profits. I added to my position because I like the intangibles with this company, and $4.40 seemed like a reasonable price.

Disclosure: I am long GLUU.