After the successful launch of the Kendall and Kylie game, Glu Mobile (NASDAQ:GLUU) appeared positioned to ride a celebrity annuity for the next several years. The failed game launches from the 2H15 were distant memories ending last month until suddenly the Jenner sister game ran into similar problems as Katy Perry Pop.
With the stock back below $3 as Kendall and Kylie slides off the charts, one has to wonder if the stock is worth still owning. A mobile-game developer is always one hit away from huge success and Glu Mobile has proven the company has the concepts right, but the execution is the problem. The latter is solvable, making the stock worth another look.
After a February release, the Jenner sister game ramped up the charts to grab the top download position on the iPhone and a top five grossing ranking. The game appeared on track to repeat if not top the success of Kim Kardashian: Hollywood. Suddenly though, the game started running into glitches that even the March 16 update didn't resolve.
As an example, check out this recent review in the App Store from Simonsk4 on March 24:
I really enjoy playing this game, however in the past week or so I have experienced a lot of crashing and glitches....
Update: It has now been more than a week since I've been able to open the app. PLEASE FIX THE GAME.
The game play is apparently so bad that it is taking down Kim Kardashian: Hollywood as well. According to ThinkGaming.com, the revenues for both games are down substantially. When originally reporting about the initial success of the Kendall & Kylie game, Kim's game was still a top 30 grossing ranking.
The Jenner sister game still garners a large amount of DAUs, but the revenues are falling off a cliff.
At the recent Roth Capital conference on March 15, the CFO unfortunately didn't address why this game had already fallen below where Kim Kardashian: Hollywood ranked for most of the first 20 months after release. Kim's game ranked in the top 15 grossing games for the iPhone in the U.S. for the first year.
So while the mobile-game developer has failed miserably in releasing successful new games in the last several quarters, the stock shouldn't be dumped without thought.
The stock ended last week with a valuation of $387 million while sporting cash at the end of 2015 of $180 million. The enterprise value sits at $200 million while Glu Mobile sported a revenue target for this year in excess of $250 million.
Valuation exists when the stock drops below $3. Tencent (OTCPK:TCEHY) has aggressively bought shares above $3, including the recent purchase of 7.2 million shares at prices of up to $3.85 on February 25. The weakness in the stock could lead to an outright offer by Tencent to buy all of Glu Mobile. In addition, the company has approved a $50 million share buyback that hopefully the company will use when shares drop below $3.
New games outside of the celebrity category could provide the company with a boost. Tap Sports Baseball 2016 should release in the next week to coincide with the start of the MLB season. Frontline Commandos: Rivals will release over the summer which is a remake of the successful WeFire game published by Tencent in China. In addition, the investment in QuizUp is another potential catalyst if the quiz game maker is successful at monetizing the game.
The key takeaway is that failure can provide opportunity if the company has a strong enough balance sheet and intellectual property. In the case of Glu Mobile, the mobile-game developer has everything aligned for success other than execution.
The stock could head lower in the short term, but investors should use further dips to buy Glu Mobile at prices far below where Tencent invested in the company on multiple occasions.
Disclosure: I am/we are long GLUU.
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