Shares of mobile gaming developer Glu Mobile soared in yesterday’s trading by 21% as Needham analyst Sean McGowan initiated coverage on the stock with a Strong Buy recommendation and a target price of USD 8. Glu Mobile closed at USD 4.85 yesterday.
Says McGowan: “We believe GLUU’s smartphone growth has been hidden in recent years by the decline of its feature phone revenue, but its new model is based on owned-IP, which is far more profitable,” he writes. “As the global installed base of smartphones and tablets grows and GLUU’s low-margin feature phone revenues burn off, we expect significant gains in profitability. Our $8 price target assumes that at this time next year, the stock will sell at a P/E of about 20x non-GAAP EPS for 2014, which we estimate at 40 cents.”
In light of this, we think it is interesting to note that mobile gaming developer G5 Entertainment is currently trading at a PE-ratio of 12x expected 2012 earnings. Needless to say that Mr McGowan and other US analysts would be all over G5 if it was listed in the USA. Applying the PE-ratio of 20x that McGowan is suggesting on G5′s 2012 earnings would imply a target price of SEK 64, a 61% upside to current levels. But then wait, McGowan is willing to apply such a PE-ratio on 2014 earnings, not 2012, i.e. 2 years in the future. 2014, G5 Entertainment will probably earn much much more than SEK 3.2 (as expected for 2012). In-line with the mid-term scenario previously mentioned by G5 CEO Vlad Suglobov, we believe G5 Entertainment should be able to earn as much as SEK 10.6 per share by 2014. There is no reason why an investor should not be willing to pay as high a PE-ratio for G5 as he/she is paying for Glu Mobile (on the contrary actually). So applying a PE-ratio of 20x on G5′s 2014 earnings of SEK 10.6 would imply a share price of SEK 212, an upside of 430%.
Obviously there is value in G5 that is not realised at this point, a lot of it due to its listing on Aktietorget, a minor Swedish exchange. In a perfect world, G5 would change its listing to the US, or at least to Nasdaq OMX’s small cap list in Sweden. The most likely outcome, in our view, will be a takeover by one of the big guys within a few years time. M&A activity within the mobile gaming space has been high for quite some time and as late as Wednesday, Zynga bought OMGPOP, the maker of “Draw Something” for USD 210m, close to SEK 1.5bn. OMGPOP is so far a “one-hit wonder” with a game that has been selling for a couple of months. G5 Entertainment has a market cap of SEK 320m at this point (an even lower enterprise value as the company has a net cash position). Again, the upside is close to 400% to what US investors and companies are willing to pay for similar companies.
We suggest to be long mobile gaming developers. There are not that many listed on the global stock markets but investors could consider a basket of Glu Mobile, EA and Gameloft in order to spread their risks. However, the one that clearly stands out as extremely undervalued, both in absolute terms and in relative terms, is G5 Entertainment.