Why You Should Buy Glu Mobile (GLUU) After Its Earnings Beat

Advertisement

Glu Mobile Inc. (NASDAQ:GLUU) shareholders are celebrating today as GLUU stock is well on its way to $7 a share after yesterday’s walloping of the Street’s estimates.

glu-mobile-gluu-stock-185After dropping 5% Tuesday, GLUU stock recouped its loss and then some with a 20% gain in after-hours trading, which likely left pessimists drowning their woes somewhere.

And Glu’s newly announced relationship with Tencent Holdings ADR (OTCMKTS:TCEHY) is a solid bet — especially at a time when GLUU’s reliance on celebrity-branding hints that on its own, Glu Mobile is fresh out of innovation.

GLUU Earnings Recap

A quick rundown on GLUU’s financial highlights:

  • Analysts were looking for GLUU to post a small earnings loss, but GLUU surprised with a profit of 2 cents in non-GAAP earnings.
  • GLUU dominated on revenue as well, reporting $62.4 million and topping analysts’ expectations of $52 million. Its revenue was a 33% increase over the first quarter last year.
  • Forward guidance was roughly in line with expectations, placing second-quarter revenue between $50 and $52 million, slightly above analyst consensus.
  • GLUU projects 2015 earnings between 20 and 24 cents, a bit tempered from the Street’s estimate of 25 cents, and revenue between $262 and $287 million. Analysts are expecting revenue of $265.6 million.

All told it was a solid report, and the so-so guidance for 2015 was offset by other big announcements by GLUU.

GLUU Bets on Tencent — and Britney Spears

The big news for GLUU, however, wasn’t the earnings beat, but the “strategic relationship” it struck with Tencent, a Chinese publisher that was recently crowned the largest game company in the world.

Tencent is investing $126 million in GLUU, or 21 million shares at $6 a share. The arrangement hands Tencent a nearly 15% stake in Glu Mobile, as well as sits Tencent’s Steven Ma on Glu’s board of directors.

This deal is huge for GLUU, and here’s why:

  • It positions Glu to enter China just as the Chinese market edges out the U.S. to become the biggest games market in the world.
  • It gives GLUU access to Tencent’s expertise in massively multiplayer online games and Epic Games’ Unreal Engine, so Glu isn’t putting all its eggs in one celebrity-branded basket.
  • The company’s balance sheet will more than double its cash hoard to $190 million, giving GLUU plenty of options for long-term success through inorganic growth.

Not straying too far from its roots, Glu announced it signed pop singer Britney Spears to a five-year contract with a possible three-year expansion for an as-of-yet untitled mobile game.

Considering the massive success of Glu’s game featuring reality TV star Kim Kardashian, it’s only natural for Glu to attempt to replicate that success. The company is more than willing to piggyback on celebrity names, citing Spears’ social media following of 39 million on Facebook Inc (NASDAQ:FB) and nearly 42 million on Twitter Inc (NYSE:TWTR).

Bottom Line

The Tencent partnership also sheds light on the volatility of social game stocks, namely the tendency to fly high one day and crash the next. Glu recognizes it can’t bank on Kardashian, Katy Perry or Spears forever.

These games may be hot today but GLUU can’t replicate that superstar success forever — and that’s why it’s partnering with Tencent.

GLUU doesn’t want to make the same mistakes as Zynga Inc (NASDAQ:ZNGA), whose reliance on Facebook revenue and fleeting hits ultimately left ZNGA trading dangerously close to penny stock levels.

Glu’s Kardashian game was a huge hit last year, but its popularity has fallen off. Regardless of how popular Kardashian is, a celebrity game is a novelty and not a time-tested franchise.

And as competitors such as Time Warner Inc (NYSE:TWX) put out mobile games that capitalize on the Batman and Game of Thrones franchises, Glu’s Tencent partnership gives it access to Tencent subsidiary properties such as Epic Games.

As Greg Ballard of Warner Bros Interactive Entertainment put it:

“Two years ago we were much more concerned about the rigidity at the top of the charts. There just wasn’t that much money being made at numbers 10 through 20. Today, there’s money to be made even as a Top 50 title. It’s a very robust market. It’s no longer winner take all. It’s winner take a lot, but not all.”

GLUU stock is looking more likely to stick around (pun unfortunately intended) now that it has more to bank on than celebrity gossip.

As of this writing, John Kilhefner did not hold an interest in any of the aforementioned stocks. 

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/why-you-should-buy-glu-mobile-gluu-after-its-earnings-beat/.

©2024 InvestorPlace Media, LLC