Seen on “All Things D” (www.allthingsd.com) today:
“Has anyone seen one of Amazon’s new Kindle Fires in the wild? I haven’t. But evidently they’re everywhere. You just need to know where to look to find them — like Stifel Nicolas analyst Jordan Rohan. According to Rohan, the Fire is selling very, very well. So well, in fact, that on Sunday evening he raised his estimate for fourth-quarter Fire sales to 6 million units from 5 million, proclaiming the device a true tablet market contender. “Kindle Fire has staked out an important market position due to its loyal Amazon customer base and attractive (low) device pricing,” Rohan said in a note to clients. “We believe the lower hardware price will correlate with high e-book and video content attach rates.” In other words, there’s some serious potential upside to be had in incremental e-commerce spending via the Fire, and Amazon’s aim is to milk it for all it’s worth. “We believe that software attach rates correlate inversely with the hardware price. From Amazon’s perspective, this could drive real upside in its North American media segment revenues,” Rohan concludes. “From a cost perspective, the shift to digital delivery of content could help Amazon avoid costly free shipping subsidies. Hence, we believe there is a great deal more to the Kindle device strategy than most have discounted.””
At his recent investor meeting in Stockholm, G5 Entertainment’s CEO Vlad Suglobov addressed the company’s big success on Kindle Fire. The cooperation between Amazon and G5 has been extensive for quite some time. Still rather limited competition in the Amazon app store made it possible for G5 games to be very successful with consistent rankings among Top Paid 100 list for the Kindle Fire. Naturally, competition will increase but the future for Kindle looks promising and G5 is now making good money on Amazon’s app store. For a daily update on G5 games’ rankings on Kindle Fire please visit: http://www.g5info.se/spelstatistik_kindle.htm
The vote is out and the winners of the Best App Ever Awards 2011 have been announced. More than one million votes were cast and as we previously reported our top-pick G5 Entertainment had managed to get eight of their games nominated for the final 10 in their respective categories (http://nordicinvestor.net/2012/01/04/several-g5-games-in-the-run-for-bestappever-2011/). While none of them made it to the absolute top, four G5 games finished among the top three. This is great advertising and a further proof of the quality and popularity of G5 games. We are looking forward to the long list of new games that G5 aims to launch during 2012 and most certainly, some of them will be among the top games this year as well.
G5 Entertainment winner games 2011:
Best Free to play game Android: Virtual City Playground, second place http://bestappever.com/awards/2011/winner/fpgm
Best Adventure game iOS: Kaptain Brawe, second place http://bestappever.com/awards/2011/winner/adgm
Best Casual game Android: Crystal Port, third place http://bestappever.com/awards/2011/winner/cagm
Best Game series Android: Stand O´Food 3, third place http://bestappever.com/awards/2011/winner/fcgm
Meanwhile, the stock market slowly but steadily seems to come to its senses and is gradually revaluating the G5 Entertainment share. The G5 share is up more than 40% year-to-date, as the company continues to deliver on its targets. Nevertheless, as we have commented on before, the current valuation is still well below the level’s seen one year ago and far, far below the levels that would be justified by the company’s performance. At yesterday’s closing price of SEK 31, the G5 share trades at a PE-ratio of 9.7x expected 2012 earnings. Exactly one year ago, the share traded at around 14-15x expected 2011 earnings. So despite the pleasant run so far in 2012, the G5 shares is still dirt cheap in our opinion and has much more give in the short-run (levels around SEK 45 per share seem realistic).
Moreover, we are convinced that mid- to long-term, we will see valuations levels that do justice to G5′s stellar operations. However, in order for this to happen, we think management will have to realize that “Aktietorget” is not a suitable marketplace for a high-class company such as G5 Entertainment. Simply by changing the listing to Nasdaq OMX, shareholder value could be increased significantly. Yes, it might cost more money to be listed there which will burden earnings somewhat but the multiple expansion that comes with such a re-listing will certainly elevate the share price. Furthermore, the current discount valuation makes G5 Entertainment very vulnerable for a hostile takeover. The success of the company certainly does not go unnoticed among its bigger competitors.
I am long G5 Entertainment and you should be too!
According to a Reuters article this morning, tablet computers using Google’s Android software narrowed the lead of Apple’s iPad on the global market in the fourth quarter, research firm Strategy Analytics said on Thursday. Global tablet shipments reached an all-time high of 26.8 million units in the fourth quarter, growing 2-1/2 fold from 10.7 million a year earlier, the research firm said.
“Dozens of Android models distributed across multiple countries by numerous brands such as Amazon, Samsung, Asus and others have been driving volumes,” analyst Neil Mawston said in a statement. Android’s market share rose to 39 percent from 29 percent a year earlier, while Apple’s share slipped to 58 percent from 68 percent a year before. The tablet computer market grew 260 percent last year to 66.9 million units as consumers are increasingly buying tablets in preference to netbooks and even entry-level notebooks or desktops.
So despite the fact that Apple is selling iPads like no tomorrow, they are still losing market share. As previously discussed, people buying tablets will want to download games sooner or later. You do the math what that means for app sales going forward.
For the quarter ended Dec 31st, Apple reported revenues of USD 46.3bn (up 73% y-o-y) and an EPS of USD 13.87 (up from USD 6.43 in the same period one year ago). Analysts were expecting revenues of USD 38.85bn and EPS of USD 10.08.
Apple said it shipped 37.04 million iPhones for the quarter, far ahead of the average analysts’ forecast for just more than 30 million units sold. In a call with analysts, Apple CEO Tim Cook said the company made a “very bold bet” with its manufacturing targets for the iPhone 4S, but still came up short on supply amid heavy demand for the device.
Shipments of the iPad totaled 15.43 million units; analysts were expecting about 13.8 million units. That more than doubled from 7.3 million iPads in the same period the previous year.
The iPad was believed to have faced its first strong competitive threat in the December quarter from the Kindle Fire, a 7-inch tablet from Amanzon.com that went on sale in mid-November for $199 — about 60% below the price of the cheapest iPad. On the call Tuesday, Cook said the “ecosystem” for the iPad, which includes more than 170,000 specialized apps for the device, is “in a class by itself” and has kept the device competitive against new entrants.
Mac shipments came in at 5.2 million units, in line with forecasts. Shipments of the iPod totaled 15.4 million units. For the current quarter, Apple projected revenue of $32.5 billion with earnings per share of $8.50, adding that the quarter includes 13 weeks. Analysts were expecting revenue of $32 billion with earnings per share of $8.02, according to consensus forecasts.
Once again a very very impressive performance from Apple. We think there is a clearly positive read-across to mobile gaming developers such as G5 Entertainment and Glu Mobile. The fact that both iPhone and iPad sales both surprised massively on the upside is very encouraging as their continued growth comes amid a simultaneous growth of Android devices (such as the Kindle Fire). The base of smartphones and tablets keeps on growing and growing and people want to fill their devices with high-quality apps.
Being one of the few listed peers of our top pick G5 Entertainment, we have followed Glu Mobile for quite some time. Based in the US, Glu Mobile is one of the leading developers and publishers of mobile games for smartphones and tablets, supporting iOS, Android, Windows Phone, Google Chrome and more. Founded in 2001, Glu is headquartered in San Francisco and has major offices in Kirkland, Washington, Brazil, Canada, China, Russia and the UK.
Similar to G5, Glu has traditionally been focused on games for featurephones, before changing focus towards smarthpones during 2009. But unlike G5, Glu has been somewhat slower with its transformation and revenues from featurephone games are expected to still represent some 30% in Q4 2011. Furthermore, Glu has yet to make a profit on its efforts, the major reason why we fundamentally prefer G5 Entertainment. Nevertheless, things are developing into the right direction for Glu Mobile and it is naturally also benefitting from the underlying growth of the smartphone and tablet markets. Management’s targets a gross margin of 88% and an EBIT margin of 20-25%, which compares to a Q3 2011 gross margin of 66% and a loss on the EBIT line. In other words, still quite a walk to go but as the higher margin smartphone business is growing fast, management expects to be cash flow positive by early 2013. The expected volume leverage should make it possible to reach the targeted EBIT margins and we believe that this will happen sooner rather than later; i.e. sometime towards the second half of 2012. For Q4 2011, the company has guided for revenues in the region of USD 16.5m and a LPS of around USD 0.11.
Why should one buy at this point?
We believe there are several reasons why the risk/reward ratio looks attractive:
1.) Following its peak close to USD 6.00 in July 2011, Glu Mobile was hit hard by the general market slump and a deflated hype around the highly anticipated Zynga IPO. Since September, the share has been traded in a range between USD 2.00 and USD 3.75 and is currently trading our USD 2.90. In other words, the share has been trading sideward during the last months.
2.) Christmas business has been extremely successful for the likes of Apple, Amazon and Samsung. Christmas Day only saw a massive 6.8m device activations (both iOS and Android), representing a 353% jump compared with tha average of the days prior to Christmas in December. iOS and Android app downloads on December 25 soared by 125%. Also comments from G5 Entertainment’s management suggest that the Christmas business was a success for app developers.
3.) That this should be applicable also for Glu Mobile becomes apparent when looking at the grossing ranking of Glu Mobile games as provided by www.appannie.com. We have screened several of Glu Mobile’s top-sellers such as Stardom: The A-List, Blood & Glory, Contract Killer: Zombies, Frontline Commando and more and noted that the rankings were consistently high in all major markets for both iPhone and iPad. So far Glu Mobile has not commented on its Christmas business and we expect this to be a major positive driver at the Q4 2011 result presentation on February 7th 2012.
4.) Insider buying: One of Glu Mobile’s directors has recently bought 68945 shares at a cost of USD 3,00 each. Before his latest buy, the same director bought Glu Mobile shares on two other occasions during the past twelve months for a total cost of USD 1.89m at an average of USD 3,00. We certainly like to see management commitment and confident in their own story.
According to Reuters, the number of Americans owning a tablet computer or e-reader nearly doubled over the holiday period as Kindles, Nooks and iPads proved to be popular gifts, a new study found. In early January, 19% of Americans surveyed by Pew owned an e-reader, up from 10% in December, with identical results for tablets, according to a report released on Monday by the Pew Internet and American Life Project.
As a result, the percentage of Americans owning at least one digital reading device rose to 29% in January from 18%, according to the survey. Amazon.com Inc and Barnes & Noble Inc each introduced new tablets and cheaper versions of their Kindle and Nook devices respectively ahead of the holidays, while Apple Inc’s iPad continued to be popular. The report also found that men and women were equally likely to own a device but that ownership was also more likely among people with higher education and higher income. The figures are from several surveys conducted by Pew. The first, pre-Christmas survey of 2,986 Americans 16 and older was conducted in November and December, while the second and third were done about 2,000 adults in January.
Certainly another encouraging piece of news for mobile gaming developers such as G5 Entertainment, Glu Mobile and Gameloft as an increased base of devices should bode well for app sales going forward.
According to a Reuters article this morning, Zynga said it bought four small mobile game companies for an undisclosed sum as the top maker of Facebook games seeks to expand its lineup on smartphones and tablets. The company’s top mobile executive David Ko told Reuters on Wednesday it had acquired German company Gamedoctors in December. Gamedoctors, based in Bielefeld near Hanover, makes the game ZombieSmash. The company also bought Page44 Studios, which is based in San Francisco, in September. That studio created the “World of Goo” game for Apple’s iOS platform.
Zynga acquired HipLogic, another San Francisco-based games company, in August. Ko also confirmed Zynga purchased New York based Astro Ape Studios in August to develop new titles. Ko declined to comment on the size of the deals. While Zynga was one of the earliest game makers on the Facebook platform, it lacks that first mover advantage on mobile, where companies such as Walt Disney and Electronic Arts have released hit games.
Swedish daily SvD had a whole page dedicated to our top pick G5 Entertainment today in its business section. While there were no news in the article, we find it extremely positive that the word starts to spread, slowly but steadily.
The newspaper sat down with CEO Vlad Suglobov in connection with its visit to Stockholm one week ago and is shedding some light on G5′s history and the recent developments in the article. CEO Suglobov once again highlights the superior earnings potential of the Freemium concept saying “it is significantly better way of monetizing a large audience” and that it is “an area were both we and many others can grow significantly”. “Most of the people do not pay anything at all but there are examples of players spend several hundred USD on one game”. The CEO also reiterates that G5′s Android business is developing ahead of expectations but “there is still a gap to iOS levels”. He is also positive to a potential new player entering the smartphone market, saying that “if Microsoft and Nokia succeed with their launch and manage to sell a couple of million units”, G5 will be ale to quickly port its game for this platform.
The positive news flow continues and the G5 share is up some 34% year-to-date. Nevertheless, at Nordic Investor we do by no means think that the share is fairly priced today. As we have pointed out previously, G5 was valued at 14 times forward-looking earnings exactly one year ago. Applying a similar multiple to the company’s 2012 target shows that there is plenty of room left, short-term. We still argue that a multiple of 14 times seems far too conservative for a company with G5′s credentials, but that’s another story.
See you at SEK 45!
G5 Entertainment’s CEO Vlad Suglobov visited Stockholm yesterday and had several meetings with investors. One of Nordic Investor’s cooperation partners was present and summarised the most important takeaways:
- The presentations were very well attended and general interest was high
- Unsurprisingly no fundamental news were presented yesterday
- In December, G5 experienced ca. 4 million downloads in total. A graph illustrated the development of actual downloads and the trend in November and December showed a heavy increase
- Current income split is roughly 1/3 each for US, Europe and Asia respectively
- A change of listing (away from Aktietorget) is not high up on the priority list and might take another 1-2 years.
- G5 will release some 200-250 games during 2012 for all the major platforms (ca. 50 “new unique” titles). This compares to around 70 releases in 2011
- All of G5 games are recovering their development costs in a matter of months. For its own IPs, the number is around 6-8 months, for games initially developed by partner studios the period varies between 2-5 months
- All of G5 games, no matter how old they are, are generating income for the company. The oldest game, Supermarket Mania, is soon celebrating 3 years on the market. G5 games are fully depreciated after 2 years which means every cent earned after that goes straight to the bottom line.
- The Freemium model is becoming more and more attractive in terms of numbers of downloads and revenues. G5 calls it the “Playground” concept and wants to release more games in this format. So far, Virtual City Playground is its only freemium game on the market. Interestingly, the game is generating a constant revenue stream for G5 ever since its release, unlike “regular” games which usually peak soon after their date of release and then show declining revenues. According to CEO Suglobov, around 10% of the gamers that play Virtual City Playground are sooner or later spending actual money in the game, buying investments points etc.
- The marketing office in San Francisco does now comprise 3 people, having being established during the summer of 2011. CEO Suglobov himself is now working out of California. G5 now employs roughly 20 people in Moscow and 90 in Kharkov.
- Despite the huge success of G5 games on iPad, the iPhone revenues are still outweighing the revenues generated by iPad.
- Suglobov highlighted that on the iOS platforms, G5 is making as much money on a game that is placed #150 today as it made on a game placed #50 one year ago.
- The big success on Kindle Fire was addressed and apparently, the cooperation between Amazon and G5 has been extensive for quite some time. The limited competition since their app store launched is one of the main reasons why G5 is so competitive on the Top Paid 100 list for the Kindle Fire. Naturally, competition will increase but the future for Kindle looks promising and G5 is now making good money on Amazon’s app store. Amazon has roughly 200 million members, being more or less “one-click away from buying a game on the store”.
All in all, a very confident and optimistic appearance of Vlad. The case is more than just intact. We are somewhat disappointed that management does not seem to prioritize a move away from Aktietorget at this point, since this would certainly take away a substantial part of the risk premium which is still weighing on the G5 share. In order to maximize shareholder value, G5 must be listed on a more widely acknowledged list such as the Nasdaq OMX. We believe that a too high of a discount valuation will sooner or later trigger a hostile bid from one of the bigger companies. G5 is performing very well in the space of mobile gaming and its growth and profitability certainly does not go unnoticed among competitors. Vlad’s presence in San Francisco should be positive for contacts in the industry, both in terms of marketing, co-operation with development studios but also potential buyers of the company.
We at Nordic Investor are long G5 Entertainment and you should be too!