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Is Glu Really This Cheap?

|About: Glu Mobile Inc. (GLUU), Includes: ATVI, KING, ZNGA
Summary

Glu is becoming much more efficient.

Glu's multiples are meager when compared to peers.

Glu has no long-term debt and an excellent current ratio.

Glu (NASDAQ:GLUU) is a mobile game developer who specializes in celebrity games. While Glu hosts a broad selection of genres, its celebrity gaming partnerships are its most important growth factor in achieving the self-established goal of 20% CAGR to 2020. While Glu has guided poorly, missing this mark for 2015, there are a host of upcoming game releases for 2016 that could help it achieve its target rate for 2016. With uncertainty in the celebrity gaming model post-Katy Perry Pop launch has driven Glu's stock price down, Glu's valuation is meager and doesn't reflect the value and potential growth for the company and its IP.

To size Glu with its competitors, look at side-by-side comparisons of price ratios. The price ratios give a means of comparing its valuation to other gaming companies and the sector in general. Glu is cheap when compared to its 5-year average as well. Glu's closest competitors are Zynga (NASDAQ:ZNGA) and King (BATS:KING). Note that Activision Blizzard (NASDAQ:ATVI) agreed to buy King at a three times price-to-sales multiple. 1-year ROE, or return on equity, gives a better perspective as to how efficiently the company is managing invested capital. Compare that to the next column, ROE TTM shows how the firm is using capital currently. This helps better asses ROE in the event that the 1-year ROE is an extraordinary event financially and is unlikely to be sustainable.

 

Price-to-Book

Price-to-Sales

1-year ROE

ROE TTM

Glu

1.0

1.0

116.03%

-1.2%

Zynga

1.2

2.8

-

-6.0%

King

5.5

2.7

-69.81%

61.5%

Industry average

3.9

4.0

-

11.9%

Glu 5-year average

5.5

2.6

-

-

(Source: Morningstar.com)

As it compares, Glu has been a relative underperformer in terms of ROE recently, but its 1-year ROE is impressive. This, however, means that this ROE is likely unsustainable, or if so, sporadic. While Glu's future ROE is not predictable within a sound range of estimation, Glu's efficiency has been improving drastically. Glu's fixed asset turnover was 39.8 in 2014, but is now 50.39 in 2015. In 2012, it was as low as 19.53. Their payables period has shrunk from 47.55 days in 2014 to 30.71 TTM. Glu's current ratio as of the latest data is 3.6. While Glu has earmarked $50 million for a share buyback and approximately $8 million for a notes convertible into a minority stake in Plain Vanilla, Glu has an ample supply to make accretive acquisitions. Glu is also generating free cash flow, its second consecutive year of doing so, and as such, has the flexibility to leverage to boost its position in the sector.

To contrast and compare, Zynga's days sales outstanding has increased and their payables period has increased drastically from 30.71 days in 2014 to 53.90 days TTM. Zynga's fixed asset turnover is also very low, 2.62 TTM compared to 2.14 in 2014. Zynga does, however, has a higher current ratio at 5.44 TTM, but their current ratio has fluctuated from the mid 2's to the current upper bound for several periods. Zynga has to use cash and financing to fund its operating cash flow deficiencies. Given the fact that Glu is more efficient and generates positive cash flow as opposed to a less efficient and negative cash flow generator in Zynga, Glu should trade with at least the same multiples. If the 1.2 P-B ratio for Zynga is applied to Glu, Glu should trade at or around $2.88 per share. By applying the sales multiplier to Glu's projected sales for 2015, then dividing by the number of shares outstanding, Glu should trade at or around $6.72. Note that this does not reflect the impact of the share buyback, which, if initiated around current prices, would equate to around 1/5 of shares outstanding.

King's days' sales period is roughly 30.5 days TTM. King's payables period TTM of 4.94 days is impressive when compared to 10.26 days in 2014. Their receivables turnover TTM is 11.96 and their fixed asset turnover TTM takes the crown with 61.22. Last year, King's fixed asset turnover was 93.45 and the year before was 218.66. While King remains the king with short payables period and an obviously successful, although un-diversified, single-platform set of games, King is running out of steam and its fixed asset turnover y-o-y decreases reflect that. King's current ratio is 4. Since King is much larger in terms of revenue than Glu, it would not be appropriate to apply the same multipliers and draw any conclusions from them. The sole purpose is to display that while Glu is the smallest of the three, it has more in common in financial and operational efficiency with King than with Zynga.

While it is much more appropriate to apply industry averages and company-specific benchmarks to determine possible trading multiples and target prices, applying the industry average P/B ratios renders numbers that Glu cannot touch in the foreseeable future. That is because big players, like King and Electronic Arts, are included in this data and move the needle towards extreme ratios. As companies mature, their P/B can rise due to the increased efficiency of cash and other assets, and their P/S can shrink due to the lower projected sales growth. Applying the company's five-year average P/S and P/B ratios is not appropriate either because Glu's ratios have, like many growth stories, decreased over time. While Glu traded pre-Kim Kardashian Hollywood for instance, its P/S ratio was a multiple of Glu's current P/S. With a projected 20% CAGR to 2020, growing efficiency metrics and a host of celebrity games in the works, it would be unwise to draw any conclusions, both negative or positive, about the celebrity model. Katy Perry Pop is one game out of several celebrity partnerships and assuming an inept model from lack-luster performance of one game is representative bias. Regardless of the efficacy of the celebrity model, Glu is becoming more and more efficient and is generating free cash flow with no long-term debt and is inexpensive compared to even a less efficient peer, Zynga.

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.