Sentiment toward mobile gaming stocks like Glu Mobile Inc. (NASDAQ:GLUU) has changed lately — and Glu Mobile stock has benefited. GLUU has gained 93% in just the last year.
Of course, that performance is colored by GLUU’s longer-term performance. The stock was near a six-year low a year ago. Over the past decade, GLUU still has declined 21%.
Glu Mobile simply hasn’t been able to drive consistent value for shareholders — because it hasn’t been able to drive consistent growth or profitability. A strategy to focus on celebrity games like Kim Kardashian: Hollywood drove optimism, and growth. Revenue more than doubled in 2014. But that strategy stalled out a year ago, while contracted costs related to similar offerings from Katy Perry, Britney Spears, and Nicki Minaj impacted profitability.
Now Glu has pivoted away from the celebrity genre. And after a year where bookings rose an impressive 50%, investor optimism has returned. But, again, we’ve been here before. Is this time really different for Glu Mobile stock?
Bull Case for Glu Mobile Stock
It very well could be different this time. As noted, Glu is coming off a better 2017. Initial 2018 guidance given after the fourth-quarter report last month looks solid as well. Glu Mobile is guided for full-year cash flow in the range of $20 million this year, after seeing an $83 million-plus drawdown just over the past six quarters.
One key reason is that Glu Mobile finally has worked through its royalty obligations. Minimum royalty payments totaled $50 million the last two years, but the 2018 figure is just $4.7 million. That will allow Glu Mobile to better match expenses to revenue this year — and help margins.
Meanwhile, that revenue should continue to grow. Design Home drove over 30% of 2017 bookings, and should have a strong 2018. Taylor Swift: The Swift Life launched late in 2017, and is a different offering than Glu’s past celebrity-based games. Glu said after Q4 it expected to be slightly EBITDA-positive simply based on its legacy business.
But first-half launches like Tap Sports Baseball ’18 and a game developed in conjunction with World Wrestling Entertainment, Inc. (NYSE:WWE) should help, with a social casino offering coming in the second half.
And it’s worth noting that the mobile gaming space as a whole looks much stronger. It was barely two years ago that Activision Blizzard, Inc. (NASDAQ:ATVI) acquired Candy Crush developer King Digital Entertainment for just 6x EBITDA and roughly 9x adjusted earnings per share. But more recently, Caesars Entertainment Corp (NASDAQ:CZR) sold Playtika for about 16x EBITDA and Churchill Downs, Inc. (NASDAQ:CHDN) sold its Big Fish Games for almost 12x.
And peer Zynga Inc (NASDAQ:ZNGA) has almost doubled in the last two years — gains based mostly on its existing portfolio, which has managed to grow for longer than many thought. The industry looks stronger. Glu Mobile looks stronger. What could go wrong?
Bear Case for Glu Mobile Stock
The most obvious reason for caution is, again — we’ve been here before. GLUU has been a stock, over time, that seems able to snatch defeat from the jaws of victory, so to speak.
And Glu still is struggling to develop hits. The Swift Life appears to be off to a rough start. Two of the top three games in 2017 by bookings — Design Home and Covet Fashion — were acquired in 2016, not developed by Glu. Kim Kardashian: Hollywood and Cooking Dash were the fourth and fifth highest-grossing games last year — and both saw bookings decline year-over-year.
There’s a lot of pressure on the 2018 launches. And it still appears that Glu Mobile needs solid performance from those games just to support the current valuation.
On a price-to-revenue basis, GLUU looks cheap relative to ZNGA, let alone ATVI or Electronic Arts Inc. (NASDAQ:EA). But even cash flow guidance for 2018 suggests a 25x P/FCF multiple. That’s probably too high without more growth coming after next year. From here, Glu Mobile still has a lot to prove — and a lot of work left to do.
If Glu Mobile succeeds, there is upside. Glu has said it could hit EBITDA margins of 15-20% at $500 million in bookings, which implies adjusted EBITDA of $75-$100 million. That would require another 50%+ in revenue growth — but likely would value GLUU at over $1 billion, double its current level.
That still looks like a big “if,” however. Personally, I’d like to see a bit more consistency before stepping in. But less risk-averse investors rightly could see value in GLUU stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
