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Haki Hika is a pseudonymous contributor to Seeking Alpha and other social trading networks including StockTwits and Twitter. The persona represents the extravagant thoughts and opinions of individuals and not necessarily their RIA firm or funds managed by the individuals. Although the... More
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  • Glu Mobile (GLUU) A Short Into Earnings? 10 comments
    Jul 29, 2014 2:29 PM | about stocks: GLUU

    We have been bearish (and wrong) GLUU for a while now (about 2/3 weeks). We first tried a short at 6.5ish (on 7/15), and covered around 6.5ish a few days later (7/16 & 7/17) after 6.2 was unable to break (If bulls want to keep buying it up, that's fine by us; We will step aside).

    A few days later (7/21) Cowen increased their price target from $6.00 to $10.00. Stock gapped up to $7+ which is where we sit today.

    At $7, Glu Mobile has a market cap of $572m. 2013 Revenues were $106m. Cost of Revenue $37m for gross profit of about $69m. Expenses: R&D ($47m) + SG&A ($42m) + Other expenses of $1m and $1m non recurring = $91m.

    $91m - $69m = $22m net loss in 2013. But that's okay. It's a growing company. Lots of companies lose money. Just look at AMZN.

    This size loss has been holding firm for the last three years. Right around $20m lost y/y/y.

    But this year, they will likely turn their first profit. I don't deny it. Their KK game is hot, and gross profits should outweigh the losses. But how should Glu Mobile be valued? That's the question.

    KING, the big kahuna of the mobile gaming industry is valued at about 3x revenue (About $2bln in revenue and a $6bln market cap).

    ZNGA another mobile gaming is valued at about 3x revenue (About $873m in revenue and a $2.6bln market cap).

    While I don't like the mobile gaming space as a whole due to the main bearish case on any of these companies (Low barriers to entry, a history of one hit wonders, etc.), for whatever reason 3x revenue is how the industry is valued by the street.

    Indeed, even GLUU has historically been valued at 3x revenue (or less).

    2011 Revenue = $74m x 3 = $222m
    2012 Revenue = $108m x 3 = $324m
    2013 Revenue = $106m x 3 = $318m

    (click to enlarge)

    So let's say the bull case is right. Let's say their revenue looks like this:

    (click to enlarge)From: http://seekingalpha.com/article/2315565-glu-mobiles-q3-revenue-could-double-the-consensus-view

    Let's pretend they are able to do: $205m in revenue.

    3x $205m in revenue = $615m valuation.

    $615m market cap = about $7.56 per share.

    So why am I short?

    The current price of GLUU is right around $7. We have even seen $7.6. This is by our book, fully valued assuming the bull case scenario. GLUU historically trades at 3x revenue at the high end. You can look back at the chart and see that it traded at about half that throughout 2013. Further, we believe the scenario to be a bit wrong.

    For starters, Kim Kardashian is getting a cut. We don't know exactly what the cut is, I believe we will find out and if the street thinks she is being paid too much, we will sell off. Where is her cut going to come out of? Cost of Goods sold, I would argue, but it really doesn't matter where because it will end up affecting the bottom line. If it is taken from the cost of goods sold, then GLUUs margins are going to be lower than KING and ZNGA (something the street will not take kindly to). Instead of the usual 30% cost of goods sold, GLUU will higher. How much higher? That's up for debate. I would argue it could get up to 43%+ of the revenue.

    Further: KING currently trades at about 8.4x EBIT. With $22.5m in 2014 profit, we're looking at $189m valuation. Now, I don't think that's the case. KING has shown itself to be a one hit deal, while GLUU has shown that it is the grinder. Game after game, different genres, styles, etc. To get their revenue. So I think trading higher is fair. But at $7.56, that would be an EBIT of 27x. A bit high IMO. What I think is fair, doesn't matter though.

    My point here is that the optimistic scenario is already baked into the price. And what's more, the KK game won't even be in the Q's numbers. It will be in the guidance, though.

    With little upside left, I believe GLUU will end up being a case of buy the rumor, sell the news. Which is why we are short and will most likely be so into the earnings report.

    **Author's Edit**: As has been pointed out in the comments below, there was some dilution since the shares outstanding I used. In my graphic below, instead of $7.56/share, that should be $6.74/share (3x revenue). $205m * 3 = $615. $615m / 91.2m shares outstanding = $6.74/share. This will also change a number of other places if you want updated numbers. But the points are all the same.

    Disclosure: The author is short GLUU.

    Additional disclosure: The ideas and market views discussed in the article are solely the opinion of the individual writing them. They do not necessarily represent the market view or recommendation of the individual's registered advisory firm, and there may be conflicts of interest between the advisory firm's clients and readers of the article. The individual does plan to buy/sell some of the securities mentioned above in either his or his clients accounts, but may or may not buy/sell any of the securities within 72 hours. Readers may or may not be informed of any decision that Haki makes regarding some or all of the ideas above.The trading of securities may not be suitable for all potential users of the Service. You should be aware of the risks inherent in the stock market. Past performance does not guarantee or imply future success. You cannot assume that profits or gains will be realized. The purchase or short sale of securities discussed may result in the loss of some or all of any investment made. In the case of short selling it can result in losses in excess of the full investment. We recommend that you consult a stockbroker or financial adviser before buying or selling securities, or making any investment decisions. You assume the entire cost and risk of any investing and/or trading you choose to undertake.

    Themes: KING, ZNGA, Mobile Gaming Stocks: GLUU
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Comments (10)
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  • Brandon Osborne
    , contributor
    Comments (175) | Send Message
     
    $GLUU has a plethora of games in development and set to be launched soon. TapSports Baseball, Real Fishing 2014, Bingo Flick 3d (Just launched), and their biggest franchise hit prior to Deer Hunter/ Kim K which is Contract Killer 3. You also note that PTT's estimate for Kim K is "VERY CONSERVATIVE" at only $60M. At #4 Grossing and still in the top downloads, KIM K: Hollywood has the potential to bring $60M in revenue in the 3rd Qtr alone.

     

    If you notice, none of the new games are outlined in revenue estimates either.

     

    Thus if there is more upside above $205M (which I find extremely likely) Then $250M in 2014 revenue gets you to $750M per your estimates.

     

    $250M x 3 = $750M Mkt Cap = $10.51/share (per your math)

     

    At these prices, Glu Mobile is also an easy acquisition target in a consolidating market. Just look to their growth, profitability, partnerships, IP, monetization platform, Hosting Servers etc.

     

    But regardless, you are entitled to your opinion. Good luck and we shall see tomorrow. :)
    29 Jul, 02:52 PM Reply Like
  • HakiHika
    , contributor
    Comments (8) | Send Message
     
    Author’s reply » Appreciate the comment, Brandon. Was actually hoping to get both our arguments in the same place, tough to debate on ST where your post gets strung out into 10+ tweets just to convey a single thought; So I'm glad you commented. I can definitely see the LT bull scenario. As I said, GLUU has proven (I think) that they aren't just a one hit wonder, that they know how to grind out revenue through multiple games/genres, so at some point (2015?) I see the revenue getting to $250m+/$300m+. But I really don't see 2014 revenue hitting that $250 figure.

     

    Just one other minor quibble: $750 mkt cap = 9.22/share.

     

    $750m / 81.32m = 9.22.

     

    Unless I'm completely missing something, I'm not sure where you got your $10.51/share from $750 market cap. Unless you're assuming a large buyback into that calculation ;)
    29 Jul, 04:18 PM Reply Like
  • Brandon Osborne
    , contributor
    Comments (175) | Send Message
     
    I used your ratios to make the figures "like". Glu indeed has 91.2M shares outstanding due to the secondary offering. Thus the like figures should be:

     

    ($205M x 3) / 91.2 = $6.74 (your estimate using Kings 3x multiple)

     

    ($250M x 3) / 91.2 = $8.22 (my estimate using Kings 3x Multiple)

     

    Regardless of guidance (which is historically always very conservative) my argument that Glu is experiencing much more growth than King. As you can see in your 2013 and 2014 revenue estimates... Glu is set to double revenues YoY, not to mention its small size, EPS growth, and profitability, thus it deserves a higher multiple than 3x revenue which King has due to an over dependence on Puzzle games and their diminishing/canabalized user base.

     

    You also are comparing apples and oranges in respect to size. KING is 10 times larger than Glu (and rightfully so based on revenues) but larger companies that are not growing deserve a lower multiple. Glu currently has a multiple of about 3.5.

     

    I find that multiple to be very low considering the upside, rev growth, DAU's, MAU's, cash flow, acquisition potential etc, but Wall St doesn't have the numbers yet to award it a higher multiple as all of that growth has come this year. Until they get a peak into Q2 and guidance tomorrow that is. But even without any of that, using their current multiple of 3.7x and your $205M 2014 revenue estimate.. you still get to $8.31

     

    205M x 3.7 = 758M / 91.2 = $8.31

     

    When you take a look at the low value that the market currently awards Glu's active users (check out my article here http://seekingalpha.co... ) there is tremendous upside here. Twitter is up 30% on a slight beat but larger than expected increase in monthly active users.

     

    Now simply think about the Millions of users Kim Kardashian: Hollywood is bringing in every week for Glu. Take that number over the relatively small existing user base and that percentage increase in users is going to be huge. I also would like to point out that nearly all of those users are entirely new to the Glu ecosystem of games (teenage girls and women) vs Glu's predominantly male existing user base.

     

    I could go on for hours but just wanted to make a reply to give you some information that "traders" will completely miss and cause them to get burned. This is exactly why your own short trades have not panned out.

     

    Glu has had a very nice run but this is what happens in small companies that reach a HUGE inflection point and were undervalued to start with. They then become momentum stocks and get overbought yes, but Glu has yet to even get to fair value. Thus, this rally can continue despite charts or traders until it gets there.
    29 Jul, 05:15 PM Reply Like
  • dumpandpump
    , contributor
    Comments (218) | Send Message
     
    shorting gluu is really very couragous, good luck.

     

    I'm long Gluu for the next 5 years and then we'll see 50$
    I'm not interested in tomorrow, I'm interested in the next quarterly results, so maybe shortterm there is some downside potential, which I'll use to build up my position.
    29 Jul, 03:37 PM Reply Like
  • @davidv411
    , contributor
    Comments (33) | Send Message
     
    According to Etrade, glu has 91.2 shares outstanding HakiHika. The 81.32m is an outdated number from yahoo finance.
    29 Jul, 04:28 PM Reply Like
  • HakiHika
    , contributor
    Comments (8) | Send Message
     
    Author’s reply » Thanks, I was indeed missing something. But then the PPS in Brandon Osborn's scenario is actually $8.22 / share...
    29 Jul, 04:47 PM Reply Like
  • User 16615772
    , contributor
    Comments (68) | Send Message
     
    HI HakiHika,

     

    I just came across your article today. Very good analysis!.

     

    May I know what is your current analysis on GLUU coming into the next ER on 10/29?

     

    Thanks and Regards
    13 Oct, 01:56 PM Reply Like
  • HakiHika
    , contributor
    Comments (8) | Send Message
     
    Author’s reply » I am no longer tracking GLUU. I get involved when a stock gets overhyped and gets to an inflection point (as GLUU did back when I wrote this article around $7).

     

    I don't think GLUU will be able to achieve guidance as I don't think the KK game actually ended up doing very well after the initial launch, but again, I haven't been following the story so I don't know. I have no opinion and no position in GLUU at this time.

     

    Sorry I can't help more.
    14 Oct, 03:21 PM Reply Like
  • User 16615772
    , contributor
    Comments (68) | Send Message
     
    Thank you for the reply.
    14 Oct, 03:48 PM Reply Like
  • hneumann
    , contributor
    Comments (619) | Send Message
     
    Of course there are a lot of Glu games that are very popular, they don't depend on KK doing very well. Well is enough. The revenue estimates for last quarter are around 100m. It seems easy to reach 205m for 2014, in which case based on 205x3/100 the 'justified' stockprice would be just above $ 6. Apparently revenues are on the rise and management sees profit for 2015, the recent SEC form 8-K could be an indication of it.
    18 Oct, 07:29 PM Reply Like
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