Glu Mobile: WWE Universe Flops, Still Load Up

|
About: Glu Mobile Inc. (GLUU), Includes: DIS, EA, TCEHY, WWE, ZNGA
by: Stone Fox Capital
Summary

WWE Universe game has gotten off to a horrible start.

Tencent Holdings has dumped at least 7.3 million shares out of an ownership position of 28.3 million shares.

The stock remains at an incredible bargain at an EV/S of less than 2x '20 estimates.

About a week ago, Glu Mobile (GLUU) released a World Wrestling Entertainment (WWE) game to minimal hoopla despite the big promises of making a game for the large entertainment franchise with millions of young fans. The stock has taken another leg lower to $7, but my bullish investment thesis wasn't reliant on a hit new game to justify record stock prices making the stock a buy down here regardless of the games success.

WWE Universe logo

Image Source: Glu Mobile website

Weak Start

Glu Mobile hadn't released a new game since the launch of The Swift Life about 18 months ago. The relatively new management team was refocusing the selection progress for green-lighting new games to improve the hit rate. The hopes were that CEO Nick Earl and his team would improve the success rate of new games so that the mobile-game developers wouldn't have to constantly buy game developers to build the business.

The big current growth games all came from acquisitions a few years back. Both Design Home and Covet Fashion came from Crowdstar and the TSB Franchise came from Tap Sports. Glu Mobile has applied Live Services and regular updates to these games to grow the bookings totals, but the initial concept and game development came from outside the organization.

These games contributed $72.4 million worth of Q1 bookings with the company total only at $92.6 million. Some of the other games would likely fall under the acquisition banner, but the company made those purchases so long ago that most of the current game development is new. None of the games generating any meaningful revenues were created by Glu Mobile in the last few years.

The key here is that the hope was the Glu Mobile could actually build a new hit game that would stack onto the existing guidance for 2019 bookings of $450 million. The guidance only factors in about $25 million for these new games expected to be released by August: WWE Universe, Diner DASH Adventures and Disney Sorcerer's Arena.

In the case of the WWE game, the game was officially launched on May 29 on both the App Store and Google Play. WWE Universe is only grossing a meager $1,843 on the iPhone in the U.S. to rank at 160th in top grossing. The game only reached a peak of #23 on the top downloads which is incredibly weak for something with the WWE franchise behind it.

Source: AppAnnie

The only saving factor is that the game doesn't appear to have been promoted by either Glu Mobile or WWE. Glu Mobile has recently focused on improving the lifetime value of game players by placing more user acquisition focus once a game has been live for awhile and perfected. The active WWE Twitter feed doesn't appear to have even promoted the game despite 10.5 million followers.

Source: @WWE

A big question is whether WWE Universe has enough game action to attract a young crowd. The current version doesn't appear to offer enough compelling game play to compete with action games like Fortnite.

The game has a rather solid 4.6 rating according to AppAnnie so a sign exists that lack of marketing is the major problem so far. Glu Mobile and WWE likely plan to promote the game at a future date, maybe along with a major WWE event.

Source: AppAnnie

Load Up On The Stock

The long-term thesis has held firmly that Glu Mobile was a cheap stock without needing a new hit game. Any big bookings growth from the WWE or Disney (DIS) games were all a bonus for a stock trading in the $1.5 billion range at the highs prior to Q1 results.

The company has targets for reaching EBITDA margins of up to 20% when bookings reach $500 million or roughly $50 million above 2019 targets. A company with the growth potential of Glu Mobile generating up to $100 million in EBITDA would normally trade far above the current market cap of only $1.0 billion now that the stock is down to $7.

Source: Glu Mobile Q1'19 presentation

The stock has dipped to an incredibly low EV/S valuation of only 2.3x forward estimates. Looking forward to 2020 bookings at $527 million, the stock trades at only 1.9x those estimates. The comparisons to Electronic Arts (EA) and Zynga (ZNGA) show the compelling numbers for the stock where peers are at double the multiples.

A big reason for the extra selloff on the stock that didn't appear justified is that Tencent Holdings (OTCPK:TCEHY) sold 7.3 million shares at $7.75. The Chinese tech giant still held 21.0 million shares heading into the day so some of the additional selling pressure to $7.0 was possibly due to Tencent dumping shares.

Takeaway

The key investor takeaway is that investors are again extrapolating too much on short-term numbers from Glu Mobile. In this case, the market is placing too much emphasis on the stock needing a hit new game and the need for WWE Universe to be that game with two more new games on the way.

Investors should load up on the stock here due to valuation with the realization that Glu Mobile doesn't need a hit game to reclaim the recent high at $11.75. No signs exist showing that Tencent is selling for other than internal reasons, providing that gift for new investors looking for a bargain.

Disclosure: I am/we are long GLUU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.