Shares of mobile gaming company Glu Mobile soared 8% in yesterday’s trading session amid increasing hype around Apple’s iPhone 5 and the consequent effects on the app markets. As we have reported previously, Glu Mobile’s CEO Niccolo de Masi is very bullish on how the iPhone 5 will affect his business in the important fourth quarter of the year. Says de Masi: “In Q4 2011, we came in 10 to 15% ahead of guidance because of the iPhone 4S release” and he added that he expects the iPhone 5 to have at least the same impact in Q4 this year and Q1 2013. Glu Mobile is the only 100% comparable listed peer to our top-pick G5 Entertainment, focusing purely on the development and publishing of mobile games.
Glu Mobile is currently trading at a PE-ratio of 30x expected 2013 earnings (the company is expected to make a loss in 2012). This compares to G5 Entertainment’s valuation of currently below 11x expected 2012 (!) earnings. As we have argued before, the valuation gap between these companies seems unreasonably high and it has actually widened recently.
Looking at the relative share price performance of G5 Entertainment versus Glu Mobile, it also becomes obvious that G5 Entertainment has been treated a bit like the forgotten child lately, with the current ratio being significantly below the 12-month average:
The underlying development is in favour of G5 Entertainment. The company continues to grow profitably and is well on track to deliver on its targets. Being listed on a small stock exchange in Sweden oftentimes leads to unusual trading patterns and a lack of attention. If G5 Entertainment was listed in the US, we see no reason why the multiples should differ in any way from those applied to Glu Mobile. Possible acquirers will certainly think along the same lines and we still believe that a likely exit a few years ahead will be via M&A – at a significantly higher (and more reasonable) valuation than today’s.
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