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.