Mobile gaming company Glu Mobile Inc. (NASDAQ:GLUU) just reported fourth quarter and full-year numbers. It was a revenue beat, but an earnings miss. The guide on GLUU stock also wasn’t great.
Against the backdrop of a broader market selling off thanks to higher rates, you need a really good earnings report in order for your stock to head higher. Glu Mobile didn’t deliver that awe inspiring quarterly report. Consequently, GLUU stock is down big. About 7% as of this writing.
Unfortunately, I don’t see a bounce back happening any time soon for Glu stock. This is a company that trails Zynga Inc (NASDAQ:ZNGA) in a not-so-great mobile gaming market that is low margin and doesn’t have big growth written all over it.
I think there is more downside ahead for GLUU stock. Here’s why.
Negatives Outweigh The Positives
Lets start with the positives.
2017 was a big bounce-back year for GLUU stock. After a rough 2016, most of GLUU’s games had positive growth in 2017, which fueled record annual bookings of $320 million. The company is also streamlining operations and cutting costs.
Those cost cutting initiatives are running ahead of schedule, and the company was able to reach EBITDA profitability in the fourth quarter.
There is also reason to be excited about the future. GLUU announced that they are working with Walt Disney Co (NYSE:DIS) to develop a new game which will include characters from across the Disney and Pixar content portfolio.
There weren’t many specifics about the game, but the guy who is developing it was the mastermind behind Star Wars Galaxy of Heroes.
That mobile game was a huge success (some data suggests it is the most popular Star Wars game ever). Can that success be replicated with GLUU’s new Disney game? Perhaps. There is definitely reason to be hopeful.
But when it comes to GLUU stock, the negatives outweigh the positives.
Despite that new big Disney game launch, bookings growth next year is expected to be around 2-5%. That is anemic. Also, while the company expects to reach EBITDA profitability and be free cash flow positive in 2018, margins are still razor thin.
GLUU thinks they can get EBITDA margins to 15-20% if bookings hit $500 million, implying EBITDA of $87.5 million.
That really isn’t that much EBITDA for a company with a $430 million market cap. It also isn’t that much considering bookings are growing at a 5% pace.
Even if bookings growth does accelerate, it would still take multiple years (likely in excess of five years) for bookings to hit $500 million. In this sense, GLUU stock is trading at nearly five-times EBITDA that is likely more than 5 years out. That makes Glu stock seem pretty expensive.
I also think it is unlikely GLUU gets to $500 million in net bookings within the next five years. I’m not a big fan of the mobile gaming market. Social media apps are becoming more multi-purpose than ever before.
Facebook Inc (NASDAQ:FB) is building out its Watch tab. Snap Inc (NYSE:SNAP) is building out Discover to look like mobile TV. Twitter Inc (NYSE:TWTR) is diving head-first into live-streaming.
With all these social apps building out entertainment channels, consumers will dedicate more and more time to their social apps. Considering time is limited, I think that means less and less time will be dedicated to mobile gaming.
Indeed, there are already signs out there that the mobile gaming market may have reached its zenith. If true, Glu stock will continue to struggle.
Bottom Line on GLUU Stock
The market is having a tough go, this stock is expensive, and the growth narrative in mobile gaming is clouded by social apps becoming more multi-purpose than ever before.
All in all, I don’t see any reason to own Glu stock here and now.
As of this writing, Luke Lango was long FB, DIS, and SNAP.
