John Gilliam's  Instablog

Notable chatter over the weekend about the possibility of a GLU Mobile (Nasdaq: GLUU) engagement to one of several well heeled suitors.  Of course, all the usual suspects are involved - Electronic Arts (Nasdaq: ERTS), Activision (Nasdaq: ATVI), Nokia (NYSE: NOK) and even Apple Computer (Nasdaq: APPL). This is not the first time we have heard such, but this time we are seeing the kind of volume that lends much more credence to the talk. With the overall market getting bruised badly today, GLUU shares were up 23% on nearly 10x their prior 10 day trading volume.  Such a spike in trading volume is fairly common in the days leading up to a merger announcement and the price action certainly suggests there are investors who want to get into this stock now and do not mind paying up to do so. Past management discussions of sector valuations suggest that Gluu might take a pass on any sub $100 million overtures, so we would expect any deal to price in excess of $3 per share on the low end and we should see the stock continue to trade higher if there is any substance to these rumors.

While we do believe there may be substantial interest from some of these names and possibly a few others, we believe its just as likely that the Street is simply revaluing the Gluu story. With Apple's iPhone set to price at $99 beginning this Friday, there is substantial reason to believe that GLUU's outlook stands to improve markedly between now and year end. We fully expected to see the $99 iPhone price point prior to the Christmas selling season (see 01/12/2009 Seeking Alpha article re: Gluu) and feel it is very bullish for GLUU and other mobile gaming players that the move has been made early enough to allow the "iPhone as a gaming platform" market to develop prior to the big Christmas retail push. GLUU management appears to be executing on its plan of reallocating resources to push much more heavily into the development of games for the iPhone and this combined with their extensive experience with monetizing these assets bodes well for GLUU shareholders.

Another factor that could be pushing GLUU shares higher is the anticipation of the possibilities with the iPhone’s new 3.0 software update, which will allow Gluu and other game developers to charge for items “within a game”. This opens the door to many new monetization possibilities including charges for premium weapons or tools, new levels or cooler gear.  Developers could conceivably just give the game away for free, but make even more money with up sells within the gaming experience.  This offers great potential for greater monetization per user vs. the traditional one time payment of anywhere from $0.99 cents to $9.99, where the average has generally been closer to the $2 level. 

These iPhone developments could be a major watershed event for the mobile gaming industry and GLUU is arguably the purest mobile gaming play among publicly traded companies. With a market cap that (even after the aforementioned run on the shares) is only $44 million in a sector that is likely at the beginning of a secular trend that could make blockbuster profits for those best positioned to take advantage of it, Gluu stands out as one of  the best ways for investors to get mobile gaming exposure. However, the smallish number of shares (float less than 10 million shares) available could make it difficult to accumulate much of a position without moving the stock substantially. 

Disclosure - long Gluu, Appl, Atvi