GLUU Stock Is Stuck in a Bad Cycle

Advertisement

Gluu Mobile (GLUU) is a global developer and publisher of free-to-play games for smartphone and tablet devices. GLUU develops games based on its own brand as well as third party licensing. GLUU generates its 95% of its revenue through the sale of its games as a smartphone application, which is up from 88% in 2013.

GLUU’s latest breakout hit is the Kim Kardashian Hollywood game that launched in early summer. The objective of the game is to move from the E-list to the A-List by, basically, doing nothing.

Well, there is more to the game that that, but that is certainly what it seems like to me and I am not alone.

The game set a record single-day revenue record and quickly reached #5 as a top grossing app on the Apple App Store, which is very impressive given the fact that only about 2.2% of gamers actually purchase anything from a free downloaded game.

Revenue Does Not Turn To Profits

GLUU has not been able to produce a profit from the sale of its games. In the first quarter, GLUU reported GAAP revenue of $44.6 million, gross margins of 69% producing a GAAP operating income of $0.7 million, or 1.6% of revenue. In the second quarter, GAAP revenue was $40.9 million, also on gross margins of 69% producing a GAAP operating loss of $3.7 million, or negative 9% of revenue.

Although both quarters showed better performance than the previous year, I don’t see the light at the end of the tunnel as to when expenses can decline to the point that a profit can be obtained.

GLUU Stock Price — All Fluff, No Substance

GLUU stock price is up 37% year-to-date, but it has been volatile with a Beta of 3.6. GLUU continues to dilute shareholders’ stakes with a secondary offering for $34.5 million, for approximately 10 million shares in May, and with the acquisition of Cie Games in June of this year just filed a shelf registration for 10 million more shares.

Including the above, GLUU has completed three secondary offerings in less than four years. In addition, there are 13 million in stock options outstanding with a strike price below recent trading making them likely to be executed.

Among all this dilution, insiders continue to sell. This past year insiders sold 4.7 million shares!

Bottom Line

GLUU’s growth strategy is to buy smaller gaming platforms and then leverage shared services to increase profits. Since GLUU has insufficient cash to purchase new gaming platforms outright, it utilizes secondary offerings to fund the purchase, using its stock as currency. That strategy would work if GLUU could turn the games purchased into cash generators by enticing and holding onto large buyers of in-app purchase opportunities.

A recent study by Swvre, an app-testing firm, showed that only 0.15% of the of people that actually buy any in-app purchases from free games account for 50% of purchases. Reports show that some gamers spend upwards of $10,000 per month in-app purchases.

Until GLUU can prove that it can attract and hold onto this critical demographic within the free-game/in-app purchase niche and convert that into a profitable business, GLUU stock should be considered a solid sell.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/gluu-stock-gluu-mobile-second-offering/.

©2024 InvestorPlace Media, LLC