Glu Mobile Inc. (NASDAQ: GLUU) develops, publishes and markets games appealing to the users of smartphones and tablet devices who download and purchase the games through direct-to-consumer digital storefronts. It operates through mobile games segment in various geographical regions, such as the Americas, including the United States; Europe, the Middle East and Africa (EMEA), and Asia Pacific. It creates games in various genres, such as action, celebrity, sports, and simulation that are based on its brands, including the likes of Contract Killer and Cooking Dash. It also creates games based on third-party licensed brands, including Kim Kardashian: Hollywood and Kendall and Kylie Jenner.
The stock is going through difficult times at the moment partly because conditions in the market have not been particularly good. Some investors who entered the stock because of the hype about the Kim Kardashian game may be feeling let down, but investors who believe in the potential of the company to prosper with its other games have reason to be optimistic. The company does recognize that more cost will be associated with the licensed games and this in turn could hurt gross margins over the next few quarters. However, the company has beat its own guidance for 18 consecutive quarters, and they intend to carry on with this objective. Last week they announced that they would consider the acquisition of Cie Games Inc. before the close of the third quarter, which will add yet another hit game, Racing Rivals, to the portfolio. The euphoria about the Kim Kardashian game, which lifted the stock price and resulted in gains of almost 90% is now running out of steam and this puts question marks about the future performance of the stock.
The company has released the latest version of Tap Sports Baseball and the game has continued to be the top downloaded app for the iPhone for about a week. This means that there could be upside for the stock if the game were to become a hit as part of the top 10 grossing games. The game was officially released just prior to the start of the MLB season and the company has successfully released previous versions of the game, so that there have been positive market expectations from the current release. Learning from the past, though, many games do not live up to the hype and the initial strong downloading and this results in monetization, which is not up to expectations. Moreover, under the previous CEO, the company relied on franchise and celebrity names without enough innovation on the new versions to attract loyalty of gaming customers.
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Hitting the top download spot has huge positive implications and Tap Sports Baseball 2016 produced almost $ 11 million in bookings for the first full quarter of the previous year and $ 27 million for the year. The difference between a grossing rank in the top 10 and the number 20 ranking for this game can amount to more than $ 100,000 every day for the iPhone market in the US alone. The company has a broad portfolio of games which generate revenues and help to diversify downward risk in any one or more games. The company has disappointed investors over the last couple of years because, after a couple of hit games, new games have had limited success. Many people believe that the stock is just too cheap because of the safety net provided by the current business and the bookings for 2016, were largely based on franchising games published before 2015. Even a minor hit can produce a perceptible jump in bookings and revenue and the company currently has a strong base of around $ 200 million in annual bookings and for the fourth quarter, $ 17.7 million in bookings were achieved by games published in 2014 or before. The cash position is solid with the company forecast showing 2017 ending with more than $ 60 million in cash and no debt. The company will have a cash burn of $ 40 million this year, partly because of restructuring charges of around $ 5 million and royalty payments pushed back from the fourth quarter of 2016 to 2017. With the new CEO in position, there are a number of upside catalysts such as the ability to turn Taylor Swift into a major hit and reverse past failures in the celebrity category.
The bottom line
At the current stock price, the company has a valuation of just around $ 300 million and a targeted enterprise value of $ 240 million based on the target for the year end in cash of $ 60 million. The company forecast 2017 billings at $ 220 million with no allowance for a major hit and everything that the company generates from Tap Sports Baseball 2017 is pure gravy. If their bookings jumped from $ 220 million to say $ 250 million, the multiple would rise for the company stock and an enterprise value of 2X bookings suggests that the share price might easily see double digit gains. Tap Sports Baseball 2017 could just turn out to be a major hit and reach a top 10 grossing rank and, if this happens, there could be considerable upside from the current price of.
Source: Broad Street Alerts Editor
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