Glu Mobile (NASDAQ:GLUU) has staged a recovery in recent months. That comes after a tumultuous time for GLUU stock. After hitting $7 in 2015, Glu entered a massive downswing. Shares bottomed out below the $2 mark in late 2016.

However, Glu Mobile has turned things around. Under a new management team, the company has found a viable path toward profitability. Revenues are up, while the company is keeping a tight lid on costs. Encouragingly, Glu Mobile is set to report positive earnings per share later in 2018 for the first time in several years. Not surprisingly, investors have bid GLUU stock back up to near-2015 highs. However, the road ahead gets more difficult for GLUU stock.

New Corporate Strategy for GLUU stock

In the past, Glu Mobile was hampered by a boom-and-bust gaming cycle. As the company freely admits, it spent heavily on new games long before they brought in a dime of revenue. The old model of paying for a license — often with a pricey celebrity endorsement — and then having employees work on a game for a long time before generating revenue created a great deal of risk for the company.

The new approach is to get games out faster with a significantly smaller upfront investment. As the company puts it, it wants to “fail fast,” seeing what works and what doesn’t. That limits downside and lets it invest more in projects that are showing significant momentum.

As a result, the company’s new approach focuses more on community-building. Instead of getting everything perfect at a game’s launch, Glu is now prioritizing social interaction, content updates, and in-game monetization opportunities. Particularly for mobile games, this seems to be the right approach in the changing gaming environment.

Pivot Is Producing Results

Glu Mobile’s most recent quarterly results highlights just how well this strategic change is working. For the first quarter in 2017, the company produced a gross profit of $32 million on revenues of $57 million. After paying for research & development and corporate overhead, Glu lost $19 million.

For that same quarter this year, Glu managed a major boost in revenue, from $57 million to $82 million. Its direct costs increased by only a tiny fraction of that, leading the gross profit to surge to $51 million. The company held the line on selling, general and administrative (SG&A) and research and development (R&D) costs. As a result, its operating loss decreased from $19 million last year to just $6.7 million for that quarter this year.

Since management is forecasting $90 million in revenues for this current quarter, it’s entirely possible that Gluu will actually turn an operating profit. It’s been a long time since Glu has managed profits.

Still a Hit-Driven Business

As well as Glu’s efforts to boost revenues and contain costs are going, the business is still vulnerable. GLUU stock is of a decidedly small-cap nature. The company isn’t diversified in the same way that the industry leaders such as Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two Interactive (NASDAQ:TTWO) are.

To see that specifically, look at Glu’s top games for the first quarter of 2018. Its recent hit, Design Home, brought in $34 million in bookings, or 40% of the company’s total for the quarter. Covet Fashion and Kim Kardashian Hollywood both came in the $11-$12 million range, making up another 27% of the company’s bookings. Thus, just three games made up two-thirds of Glu’s overall business. Throw in Tap Baseball and Cooking Dash, and Glu’s top five games make up around 80% of total revenues.

Thus, for all of Glu’s talk of a deep catalog and evergreen content, the company still has just a few core properties that drive most of the business. That’s not necessarily a bad thing. But management’s efforts to build out a more diverse and long-lasting series of revenue streams remains in the early innings. On top of that, almost all of Glu’s games are in the casual space, leaving the company potentially more exposed to changing customer interests than in more hardcore gaming franchises where users have deeper ties to the product. Franchises such as Kim Kardashian Hollywood are unlikely to have little appeal once the celebrity in question fades from the public spotlight.

Verdict on GLUU Stock

Glu’s management team is doing a lot of things well. In particular, its efforts to contain costs have been a success. The company isn’t staking so much on each new game, allowing it to finally find what seems like a sustainable path to profitability. After years of losing money, that will come as a relief for GLUU stock owners.

That said, it’s far from a clear path upward for GLUU stock. In 2011, 2014, and 2015, GLUU stock reached the $6-$7 area and then slumped sharply. This is an area of long-running technical resistance for the stock. It will take more than a moderate upturn in the company’s revenues to sustain the stock’s recent gains.

Ultimately, Glu still has a ton to prove. The company has an $800 million-market cap that is supported by $50 million in cash and a roughly $350 million-per-year gaming business that has generated positive EPS just one year out of the past decade.

Glu Mobile appears to be turning the corner on an operational basis. But given its relatively weak game franchises compared to much larger rivals, it has a lot left to achieve before GLUU stock will move to new highs.

At the time of this writing, the author held no positions in any of the aforementioned securities.