Apple's (NASDAQ:AAPL) App Store now hosts 700,000 apps with 250,000 dedicated to the iPad. On Google's (NASDAQ:GOOG) Android Marketplace, it's 530,000 mobile apps and counting. Most pundits agree that there have been one billion smartphones sold since the launch of the iPhone, and that figure is expected to swell to between four and six billion by 2016 depending on who your source is. Throw in the proliferation of tablets, and you've got an ever expanding universe of mobile applications. The mobile app market is projected to reach 25 billion dollars by 2015.
One company many investors are getting familiar with in mobile content creation is Glu Mobile (NASDAQ:GLUU). It's gotten quite a bit of coverage on Seeking Alpha, as well as on CNBC with endorsements on their Fast Money program by John Najerian, and influential tech analyst Dan Niles during regular broadcast hours. Glu Mobile trades in the $3-$4 range, but was as high as $5.90 earlier this year. Its consensus one-year target price is $6.78 according to Yahoo Finance.
If you are new to the mobile application space, or to Glu Mobile itself, you may not be aware that the company was far from the up and comer that it currently is. Just three years ago it was a washed-up equity selling for 23 cents a share. If you'd had the stomach to buy Glu during those dark days of 2009, you'd have yourself a 15 bagger.
I've spent a considerable amount of time researching publicly traded mobile app content creation companies that are trying to court the attention of investors. Stocks that have some similarities to Glu Mobile when it began its turnaround campaign in 2009. To the best of my knowledge, there are only two: MEDL Mobile (OTCQB:MEDL), and Bitzio (OTCPK:BTZO). One is an over the counter bulletin board (OTCBB) stock, the other trades on the Pink Sheets. Including Glu, these are the only stocks publicly traded that are mobile app pure plays.
MEDL Mobile derives its revenue from four platforms: 1) the development of customized apps, 2) the incubation of apps from a library of more than 75,000 concept submissions, 3) the sale of advertising and sponsorship opportunities via mobile advertising networks, and 4) the acquisition of apps. On the surface, this sounds like a diversified organization, but according to its most recent 10-K, 93% of MEDL's total sales are derived from the custom development of mobile applications.
The mobile application landscape is littered with programming and design studios, so there is not a significant moat around this company. However, it has an impressive client list with large entities such as Taco Bell (NYSE:YUM), Monster.com (NYSE:MWW), Medtronic (NYSE:MDT), Verizon (NYSE:VZ) and About.com. It's nice to have a stable of top selling apps, and it's nice to have a roster of impressive clients, but the only way MEDL Mobile can differentiate itself from privately held companies is with its proprietary "Mobile Brain."
Here is the MEDL's description of this technology:
"Mobile Brain" provides a system and method for characterizing and quantifying a person's interests using a computing algorithm to assign certain lifestyle characteristics and a numerical value to the importance of a particular lifestyle trait. The Mobile Brain evaluates the usage history of every mobile app by each individual user to evaluate the user's interests. The engine then uses the data to develop a dynamic digital portrait of the user in order to recommend other applications.
Although algorithms work exceptionally well for most high frequency trading firms, and a company like Google with its search technology, things haven't fared so well for MEDL Mobile. It was short on revenue expectations this Summer, and the stock has been in a race to the bottom of the charts. It is in great need of proper financial lubrication, as the stock has dropped from $1.15/share, to approximately $.20. Right about where Glu Mobile was crossing the tape in 2009. It is up against it.
I had a long talk with Bitzio CEO Peter Henricsson last week. Spent about 40 minutes on the phone with him, and think it may have potential just like Glu did three years ago. In fact, the two companies have similar stories in some respects. Glu Mobile was in a turnaround situation in 2010 when CEO Niccolo de Masi came on board, and began a new vision for the organization. That vision was to go strictly to smartphones, create a quality brand, and implement the freemium distribution model. So far, the strategy has paid off handsomely for Glu.
For the past year, Mr. Henricsson was working behind the scenes at Bitzio in regards to strategy, and during the Summer, adjusted the company business model. After investing a considerable personal sum in the corporation, he took over the helm. His background is in the mobile infrastructure space, so he has executive experience. The battle plan is to acquire licenses to existing fan bases, make quality apps for them, then monetize the apps. Bitzio will initially utilize a freemium model, which will make money from additional add-ons to the applications, just like Glu does.
The first organization that Bitzio has partnered with is the NFL Players Association. It is set to release a trivia game where NFL fans compete against each other. This is a similar sounding story to other mobile games, but the NFL has 180 million rabid fans. Not all fans use smartphones, or play trivia games, but this is Bitzio's targeted marketing strategy. It is a joint venture, and the licensing rights are free in the partnership. Financially, it's a 70/30 split, where Bitzio gets 70% of the revenue, and the NFL Players Association gets 30% - after the Apple and Google app stores take their cuts.
Mr. Henricsson explained to me that it has considerable business contacts, not just technology relationships, and is hitting the bricks to partner with additional athletic organizations. He didn't give any specifics, but you can infer that NASCAR, Major League Baseball, The National Basketball Association, English Premier League Soccer and sports like Cricket may be in the works. New licensing partnerships may be announced in the next few months.
Another part of Bitzio's business plan is to take advantage of the cult of personality that pervades our society, and make applications for entertainment stars with large fan-bases. For instance, recording artists rely less and less on audio sales, and make a considerable amount of money in merchandising. Bitzio custom made apps will connect stars to their rabid fans. Bitzio recently announced a partnership with ROAR, a Los Angeles based talent agency that also has a stake in the company.
Because Bitzio's existing apps have been downloaded 45 million times, it has a proven track record in development and design. Recent acquisitions of app development studios Knucklehead and ACT Software, as well as animation studio Motion Picture Corporation, gives it the talent and studios to produce everything in-house. Maybe fortunes are changing.
Both Bitzio and MEDL Mobile trade for under 25 cents. If you are thinking of economizing, and purchasing a small stake for a quick killing, buyer beware. There's a reason it trades for a quarter. Twenty-five cents can fall to twelve cents. You may think you're not losing much, but that's 50%. They are small, unproven business that happen to reside in an explosive growth sector. This doesn't mean they will succeed.
Investing in stocks for under $1 is out of my comfort zone, but you may feel differently. They both have a toehold in the mobile app space, but they're always on the fringe of going private, going bankrupt, or going nowhere. They could also be scooped up by a larger entity, and you'd make money in a heartbeat.
Both stocks have extremely low volumes, which makes it difficult to get in and out of positions if you are a day-trader. Always use limit orders with any stock, but especially these two, or any bulletin board security. If I had to pick between the two, I'd invest in Bitzio. My personal preference is to stick with a proven winner like Glu Mobile. If either Bitzio or MEDL Mobile start to execute, I'd rather buy them for a buck than pennies on the dollar.