PSB Monthly Issue December 2014

In fact, some analysts believe mobile gaming could be a $100 billion global industry within the next couple years.

Here’s the thing…

Of all the apps people spent money on for the iPhone, 89% of them were games.  For the iPad, it was 90%.  And, 39% of time spent on all smartphones worldwide was on games.  On tablets, it was a whopping 67%.

But what’s really interesting is this isn’t the traditional gamer we’re talking about. Mobile gaming has opened up video gaming to a much wider audience.

With the easy access and flexibility of mobile gaming, the typical gamer has evolved. Mobile games are appealing to people of all ages and genders.  Gaming is no longer the province of 16-32 year-old males.

Of course, the much larger gaming base means that much more revenue to be had.

However, the revenue model of mobile gaming isn’t cut and dry.  Part of the appeal of this type of gaming is how cheap it can be to play on your phone/tablet.  As such, pricing and pricing models are extremely important to the success of mobile gaming companies.

One company which has excelled at developing and pricing mobile games is GLU Mobile (NASDAQ: GLUU).

THE MOBILE GAMING BUSINESS

GLUU develops a portfolio of action/adventure and casual games for smartphones and tablets.  The company sells its games through digital storefronts (directly to consumers), such as the iOS store on iPhones and iPads.

Some of GLU’s most popular titles include Deer Hunter, Eternity Warriors, Blood & Glory, Frontline Commando, Motocross Meltdown, Diner Dash, and several others.  However, the companies biggest hit came this year with Kim Kardashian Hollywood.

The Kardashian game turned out to be solid gold for GLUU.  The casual game has had an astonishing 23 million installs with 5.7 billion minutes played.  More importantly, the behemoth app brought in over $43 million in the third quarter alone!  That’s more than all the company’s other games combined.

Talk about a hit…

GLU seems to have figured out exactly how to price mobile games.  Almost all of the company’s games are free to download and free to play.  A player will then have the chance to spend money during the course of game play.

None of the purchases are necessary to play, but make the player’s life easier or unlock additional features.  GLU will also run in-game specials every now and then, which helps add to impulse purchases.  Overall, the system seems to work extremely well.

And that’s not all…

GLUU offers a highly diversified set of games.  The company has big hits in several gaming categories.  In other words, unlike some of its competitors, the company isn’t relying on one genre for all its revenues.  The variety of games appeals to casual gamers, hard core gamers, and everyone in between.

What’s more, GLU is launching several sequels to its strong lineup over the next couple months.  And don’t forget, with the holidays almost here, people will have a lot of extra time to play games… and spend money on those games.

THE NUMBERS

The success from GLUU’s Kardashian smash hit game is clear to see in the third quarter numbers.  The company’s $83.6 million in quarterly revenues is a whopping 270% increase over the same period last year.

As I mentioned earlier, $43 million came from the one game.  The rest came from all the other games combined.  However, the Kardashian game should continue to thrive for at least one more quarter, which leads up nicely to several new game launches for GLUU.

Besides revenues, the Kardashian game (and the other revenue generators) helped make the third quarter an all around impressive financial period.  Despite a huge increase in revenues, gross margins still came in at nearly 60%.  Plus, Adjusted EBITDA jumped from a loss of $4.1 million a year ago to positive $14.8 million.

Even better, GLUU has the kind of strong balance sheet you’d like to see in a growing company.

Cash holdings are $54 million, and the company has no debt.  That means management can keep developing new games or making strategic acquisitions when necessary.

INVESTMENT RISKS

As with any small cap investment, GLUU does have a few risks.

A slowdown in the overall economy could dampen the amount consumers spend on mobile games.

Additional competition in the space could make it harder for the company’s games to gain traction.

Finally, changes in how games are priced could require a strategic shift in GLUU’s pricing model and put pressure on profits.

POTENTIAL RETURN OF 94% OR MORE

Given the success of current games, the promising future game lineup, and the strong cash position, GLUU’s future looks extremely promising.

Yet, the company is trading at just 1.9x sales and 2.1x book value.

Major players in the video game industry tend to trade at 3x sales or higher.  And keep in mind, over 50 cents of GLUU’s stock value is its cash position alone – making the valuation metrics look even more attractive.

Based on our analysis, we see GLUU climbing to $7.00 a share or more.  Buy the shares now for potential gains of 94% or more!

ACTION RECOMMENDATION

BUY Glu Mobile (NASDAQ: GLUU) up to $4.00 per share.

Don’t forget your position sizing and stop-loss rules.