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Focus Article: Glu Mobile (GLUU)

  • October 12, 2012

Insider buying slowed down to a trickle over the last two weeks leaving us with very few candidates for the weekly focus article. Following the big decline in one of our portfolio companies, Glu Mobile (GLUU), I decided to write a weekly focus article providing an update about this mobile gaming company instead of highlighting a new opportunity. Just as I started working on the article, I noticed amongst the purchases last night that Hany Nada, a co-founder and managing partner of GGV Capital purchased $9.9 million worth of shares this week. As mentioned in our prior weekly focus article about Glu Mobile, GGV Capital was one of the original venture capital investors in Glu Mobile. To get a general overview of the app store ecosystem and Glu Mobile, you can check out our two part report about the company here and here.

Over the last two years, I have seen both GGV Capital and another fund Becker Drapkin Partners sell shares in the $5 range and pick them back up when the stock pulled back to the $3 level. Becker Drapkin Partners is a Dallas based activist firm that tends to invest in small cap companies. In our prior article we made the case that there were three potential catalysts that could propel Glu Mobile higher.

1. The first catalyst was that the company would continue to turn itself around under the new CEO Niccolo di Masi by executing against its business plan and achieving profitability in 2013 or beyond. The company has continued to execute well against its plan of investing in the smartphone market even as its traditional “feature phone” revenue dries up. Revenue was up 33% last quarter and net losses have been narrowing. Social and mobile gaming company Zynga’s stock has been in free fall after the company reported a $108 million loss in Q2 2012 and guided down full year revenue to a range of $1.09 billion to $1.1 billion from its prior forecast of $1.15 billion to $1.23 billion. There has been a big exodus of talent from Zynga and the company is going to take a write down of $95 million against its hasty $210 million acquisition of OMGPOP, the maker of the surprise hit Draw Something that did not have the lasting power the company expected. Zynga was priced to perfection before this dramatic fall from its intra-day high of $15.91 in March to current levels. I looked at the company when it dropped to $6 in June but decided to stay away. While Zynga is facing some serious issues, Glu Mobile has reiterated its third quarter forecast of revenue of $20.75 million (midpoint of forecast) and an EBITDA loss of $3.55 million (midpoint).

2. The second catalyst we discussed was a potential acquisition of Glu Mobile by a large gaming company like Activision Blizzard (ATVI), Electronic Arts (EA) or Zynga (ZNGA). With both Electronic Arts and Zynga seeing their stock plunge sharply this year, the prospects of either company buying Glu Mobile has diminished and that could be one of the primary reasons for this large drop in Glu Mobile.

3. The third catalyst we discussed was the potential of a blockbuster hit from the company. While the company has had some moderate hits such as Gun Bros, Deer Hunter and Blood & Glory, it is yet to release a blockbuster hit. With 11 new games published last quarter there is always the possibility the company will come up with a large hit but this is not a catalyst an investor can bank on.

The company released a new game this week called Death Dome that has already made it to the top 20 free iPhone apps list. The company has also been making selective strategic acquisitions such as the $2.8 million acquisition of GameSpy. According to Glu’s CFO they picked up the company almost for free because the company had $900,000 in cash, $1.3 million in accounts receivables and $500,000 in net book value assets.

When we wrote our last weekly focus article about Glu Mobile in January of this year, we mentioned that acquisitions in the mobile gaming sector have been at multiple of 4 to 6 times sales and Glu Mobile was trading for just under 3 times sales. While the stock is now back to almost the same price it was in January, it is trading for just 2.4 times sales on account of the big jump in sales over the last two quarters.

There is little doubt that staying invested in the stock is like being on a roller coaster ride. The market segment they operate in is hyper competitive with consumer preferences changing rapidly as we saw with the sudden popularity and then subsequent lack of interest in Draw Something. Despite these challenges, the company has continued to execute well and is sticking to a segment of the gaming market that has worked well for them. The stock is up more than 11% today as I write this article thanks to the purchases by Mr. Nada. I sold the stock from my trading portfolio today and purchased a larger position in my long-term portfolio.