Coming off a strong 2017, games maker Glu Mobile Inc. (NASDAQ:GLUU) has been the center of a lot of buzz lately. However, that buzz hasn’t done much for GLUU stock.
Last year, GLUU recorded positive growth for its games for the first time in a while. Annual bookings of $320 million are expected to grow next year. Moreover, due to cost-savings, management expects the company to be EBITDA and free cash flow positive by then, too.
So, why all the sideways trading in GLUU stock?
Mostly, it’s because no matter what this company does — no matter how many successful games they make or how much money they take out of the system — they are still stuck in the dying mobile gaming market. Sooner or later, this market will get swallowed up by increasingly multi-purpose social media platforms.
Because of this inevitable demise, I don’t think there is much to like about GLUU stock long-term here. The only reason to own the shares would be as a value play. But even under unrealistically perfect conditions, I don’t think it’s not worth much more than where it’s trading today.
All together, I’m not terribly interested in GLUU stock at these levels. Here’s a deeper look at why.
Mobile Gaming Is Dying
To be sure, GLUU is trying to make several pivots. And they are working. For now.
The company is pretty much ditching its celebrity-connected games and focusing on live gaming. That pivot is paying off. Individual games are starting to perform better than they did a year ago, and bookings are at record high levels and climbing. Moreover, the company is streamlining operations and cutting costs, the combination of which is driving enhanced profitability. Hence the expected improvements in both EBITDA and cash flow.
But don’t let these near-term improvements fool you. GLUU stock is still stuck in downward spiral that is the ailing mobile gaming industry.
Mobile gaming sessions fell 10% year-over-year in 2016. They fell another 16% year-over-year in 2017. Those declines stand in sharp contract to the ever-increasing amount of time we are spending our our phones. What’s going on here?
Social media and non-gaming entertainment apps (like, YouTube, Spotify, and Netflix) are becoming increasingly complex and multi-purpose. Consequently, they are dominating mobile usage. Of the five hours per day we spend on our phones, about half that time is on social media and non-gaming entertainment. Only 30 minutes are spent on mobile gaming, which makes it difficult to keep up with Kim Kardashian.
This trend of growing social media engagement and falling mobile gaming engagement will only continue.
With all these social apps building out entertainment channels, consumers will spend more and more time on their social apps. I think that means less and less time will be dedicated to mobile gaming.
If that is true, that GLUU stock will continue to under perform.
Best Case Isn’t Even That Rosy
So, those social and entertainment headwinds are one factor holding down GLUU’s growth over the next several years. But even if the games maker hits multi-year targets of $500 million in bookings and 15-20% in EBITDA margin, it won’t be fast enough to warrant much upside in GLUU stock from current levels.
Bookings are expected to rise about 3% next year from $320 million to $330 million. Even if we assume bookings growth accelerates to 5%, it would still take roughly nine years for the company to hit the $500 million level. Assuming margins hit 17.5% by then, then GLUU is a bit less than a decade out from $87.5 million in EBITDA.
Much bigger and more stable gaming peer Activision Blizzard, Inc. (NASDAQ:ATVI) historically trades around 13-times EV/EBTIDA. A 13x multiple on $87.5 million in EBITDA implies a nine-year forward enterprise value of $1.14 billion. Discounting that back by 10% per year, you arrive at a current enterprise value of roughly $480 million.
GLUU stock currently sports an enterprise value of roughly $460 million, so, it’s in the ballpark of a best-case present value.
Bottom Line on GLUU Stock
Mutual fund managers seem to disagree with me on GLUU stock. They’ve been increasing their portfolio holdings for several quarters, with Vanguard Total Stock Market Index Fund Investor Shares (MUTF: VTSMX) among the biggest holders, according to data compiled by Morningstar.
Still, mobile gaming is in secular decline and GLUU stock doesn’t feature an attractive enough valuation to take a bet on upside through gradual bookings growth and profitability improvements.
As such, the shares look uninteresting at current levels.
As of this writing, Luke Lango was long FB and SNAP.