Glu Mobile: Undervalued Pandemic-Resistant Play
Summary
- Glu Mobile stock is starting to look up after a volatile year. We expect the uptrend in the stock price to continue and even accelerate.
- Well managed live operations and data-driven UA spending are driving the revenue up for the existing games.
- Successful recent launch of Disney's Sorcerer's Arena along with an impressive line-up of new games in beta has the potential to take the company to the next level.
Glu Mobile (NASDAQ:GLUU) is set to announce results for Q1'20 on 7th May. We expect Glu Mobile to beat the expectations on revenue as well as earnings. Also, it is highly likely that they will raise the bookings guidance for the year. The video gaming sector is one of the very few bright spots in the stock market battered by the effect of the COVID-19 pandemic. Within the video gaming sector, Glu Mobile is one of the most undervalued companies. So, strong positive results along with improved guidance from Glu Mobile should result in a strong uptrend in its stock price even in this gloomy stock market conditions.
Positive Momentum Driven by Underlying Strength
Glu Mobile stock has been on a roller coaster ride for the past year. It hit a high of around $11.5 in early April last year only to fall by more than 60%, first due to user acquisition pressure in Q1'19 followed by a delay in their new game DSA. Since then, Glu Mobile management seems to have steadied the ship with the following notable trends:
- Existing games are performing exceedingly well with live operations including new feature updates, weekly and daily competitions
- Constant monitoring and opportunistic adjustment of user acquisition spending.
- Smooth game approval and gating process culminating in the recent release of Disney Sorcerer's Arena (DSA).
- Strong and healthy new game beta pipeline after long delays and postponements.
These positive trends culminated in the recent blow out results for Q4'19. The strong earnings report resulted in a greater than 25% surge in the stock price the day after the earnings announcement.
Well Run Live Ops with Sophisticated UA Spending
Glu Mobile is continuing to add more features and improve the performance of the existing growth games. Despite the increased competition, Glu Mobile is able to maintain the grossing rankings of its key games, which is very impressive. Also, there is a significant increase in demand for video games, including mobile video games during the stay at home orders due to the pandemic starting from around mid-March.
Design Home is Overperforming
Glu Mobile's top revenue generator Design Home (DH) seems to have performed very well in the early part of the year compared to the same period last year.
Source: App Annie & Sensor Tower
Starting around mid-March, though, Design Home performance has dramatically improved, as could be seen by the improved rankings. Glu Mobile team seems to have capitalized on people staying at home during the pandemic, by introducing new products to purchase within the game at an accelerated pace. That's the reason DH seems to have broken into the top 15 rankings nine weeks in a row. The improved rankings seem to suggest that Design Home has overperformed during this period compared to its peers which were in a similar rankings range.
Tap Sports Baseball Ready for Liftoff
The situation is a little bit different for Glu Mobile's second most revenue-generating game Tap Sports Baseball (TSB). This is because the Baseball season has been postponed due to the pandemic.
Source: App Annie & Sensor Tower
As you can see, the TSB in 2020 ranking followed more or less the same as in 2019. However, Glu Mobile released TSB2020 a couple of weeks earlier, which is easy to see in the graph from the improved rankings in the last two weeks of March. So, we expect the overall Q1 performance of TSB to be similar to that in Q1 of 2019. It may be a little better given the overall improvement in mobile gaming revenue year over year. Starting from April, though, the impact of the delay in the season could be clearly seen in the graph with lower ranking compared to 2019. Discussions are currently ongoing regarding when and how to start the Major League Baseball 2020 season. As the country is actively seeking to restart the economy, the baseball season will likely happen in one form or the other. So the TSB rankings will take off at that point. But even without the season, the performance in April is impressive with good rankings overall with weekly spikes based on competitive events.
Glu Mobile seems to have managed the postponing of the baseball season very well by diverting some of the UA dollars to other games, particularly Kim Kardashian: Hollywood (KKH).
Kardashian Game - Catalog or Growth?
Kim Kardashian: Hollywood (KKH) has been part of the Catalog games, which were expected to decline steadily over the years. In fact, Glu Mobile projected a drop of $30mil in 2020 for the catalog games. That may no longer hold because of the blowout performance of KKH in Q1, which continues into Q2.
Source: App Annie & Sensor Tower
KKH grossing ranking in March and April 2019 was mostly above a hundred and falling further. In early 2020, KKH seems to have surprisingly picked up the pace, maybe due to some new drama in the Kardashian family. Noticing this and with the postponement of the baseball season, Glu Mobile appears to have diverted UA dollars from TSB to KKH starting at around mid-March. This has resulted in a spectacular performance by KKH. Expect to see a much-improved contribution from KKH in Q1 and an even larger contribution in Q2.
Diner Dash is Back and Covet Fashion is Doing Fine
After a very good launch in June of last year, Diner Dash Adventures (DDA) started fading away towards the end of the year. It is likely that the existing content was entirely played out, and new content was required. It has been doing much better in Q1'20 with new updates. Covet Fashion rankings are a bit worse compared to Q1'19. However, with improving year over year revenue of mobile games, Covet Fashion is likely to bring similar revenue in 2020 as in 2019.
DSA Successfully Launched
After a very long beta cycle and a complete revamp of the game, Glu Mobile launched Disney Sorcerer's Arena (DSA) worldwide. From the initial rankings and reactions, it seems to be a successful launch. There is a lot of buzz around the game, and there are indications that it will climb in grossing rankings further. DSA seems to be doing very well in the Android space. Also, it is doing surprisingly very well in many countries in Europe as well as in Asia, including Japan and South Korea, which is a first for a Glu Mobile game.
DSA is an RPG game that typically tends to increase in revenue over a period of time. Disney has a large number of interesting characters that could be released every now and then, which will provide a tailwind to the revenue from the installed base. As Disney releases new movies, the characters from the film would also be released with effectively getting free promotion. Even if DSA turns out to be a moderate success, the revenue is going to be additive to Glu Mobile. If the current trend in rankings and performance continues, we expect to see an additional booking of around $15mil a quarter, around $40mil for this year.
Impressive Roadmap
For a small company, Glu Mobile has an impressive and promising new Game roadmap. Most of the games in the roadmap are already in beta.
Source: Glu Mobile Q4'19 presentation
Originals, an interactive story game is showing a lot of promise in beta with both download and grossing rankings in Australia and Canada. The content seems to be fresh and exciting and targeted more towards a little more mature audience who are also the higher spenders. Originals is not a technically challenging game, and the available content, which is crucial, seems to be increasing steadily. It is highly likely that Originals will be released before the end of this quarter, as promised by the management. In the beta, Originals seems to be doing exceptionally well breaking into the top 100 ranking many times and consistently staying within the top 200 grossing rankings even while the content was being built out. Based on the popularity of this genre and the beta performance of Originals so far, we expect this to be an almost guaranteed success. The revenue from Originals will stack on top in Q3 and Q4, forcing an uptick in guidance.
Deer Hunter is a storied franchise with powerful organic downloads. This next-generation Deer Hunter World which is in beta has a lot of social elements along with a strong metagame. There are some interesting new social features recently added to this game, including an Avatar for people as they go for hunting and compete in groups. There are signs that a lot of serious effort is being put on the game as the download ranking recently surged in Australia.
Glu Mobile has been somewhat secretive about the next game from Crowdstar except referring to it as P3. Given that they started talking about it a year back, it is likely that the game has been making great strides under the radar. CEO Nick Earl mentioned a possible beta by the end of this year. So there is a high likelihood that more details will be provided in this quarterly call.
Even the game developed by the tiny company Glu Mobile acqui-hired Tap Sports Fishing, seems to be very promising as the social features mentioned in the game seem to be better than that of the popular Fishing Clash game from Ten Square Games.
In addition, the roadmap slide from Glu Mobile has this entry "Also Includes Several Original IP Titles in Pipeline". This indicates that the rapid prototype and green lighting process introduced by CEO Nick Earl when he took over seems to be in place and working well.
Overall the upcoming lineup of games shows that Glu Mobile is punching well above its weight. Even if one or two games out of this turn out to be moderate hits, the impact on revenue is going to be massive for a small company such as Glu Mobile.
Impressive Talent Makes an Attractive Target
Glu Mobile is brimming with talent from top to bottom. It has become a mobile gaming powerhouse, albeit tiny.
One of the most impressive feats that they achieved recently was the successful launch of DSA. Initially, during the beta in Australia, the game was operating in a "real-time" RPG mode. A select group of hardcore gamers loved the game, but it was not expanding to a larger group of people as the game mechanics were too hard to master. This issue probably was realized early last year when Glu Mobile announced the delay of the launch of the game. Recognizing the importance of the game to the credibility of Glu Mobile, the Glu team went to work. It completely changed the mechanics from real-time to turn-based in a matter of a few months. It rereleased the beta in Q4'19, followed by a beta in Canada within a couple of weeks. This shows the sheer talent of the team, as well as the trust management has on the team.
Glu management has claimed that they could monitor in real-time and dynamically allocate UA dollars in many of their presentations. The sophistication of the systems they seem to have built was most noticeable when TSB took a step back, and KKH shifted into a higher gear.
These creative and operational talent is precious in the mobile gaming industry. Imagine what this team could do if they could get to unleash such talent on the languishing mobile assets of companies such as EA or ATVI. Glu Mobile remains a desirable target for many larger gaming companies and also companies that are looking to enter the mobile gaming space.
Most Undervalued Gaming Company
The roller coaster ride of the Glu Mobile stock in the last few years has hurt the investor trust. The market valuation of Glu Mobile has remained very low compared to its peers. Even with the recent uptick in its stock price, Glu Mobile is valued only at around $1.26B which is less than three times the forward revenue of $428m.
Data by YCharts
As could be seen from the graph above, the EV to Forward Revenue ratio is the lowest for Glu Mobile compared to its peers. Mobile gaming, in general, has been viewed as a fickle industry even though long life of mobile games with live operations has made the revenue streams much more predictable even better than the console and PC based gaming companies. However, as Glu Mobile revenues and the earnings grow quarter after quarter, the markets will have no choice but to recognize the potential and award the appropriate valuation for the stock.
Conclusion
In this pandemic environment, very few sectors are looking up, with mobile gaming being one of them. Glu Mobile is one of the most undervalued companies in this space with a promising future. Their impressive live ops is bringing in improved revenue for their existing games while the promising new game line-up is expected to stack more revenue on top of that. We expect Glu Mobile to beat bookings revenue expectations for Q1'20 and also raise the guidance for the whole year. As Glu Mobile introduces new games almost every quarter this year, we expect this beat and raise pattern to continue. This improved execution will likely increase the credibility of Glu Mobile management. When Glu Mobile is regarded as a credible player in Mobile gaming, the stock price will improve and move closer to the revenue multiples of its peers, which it deserves.
This article was written by
Analyst’s 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.
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