Mobile games maker Glu Mobile Inc. (NASDAQ:GLUU) was one of the hottest stocks in 2017. GLUU stock rose nearly 90% in 2017 as the company’s turnaround efforts through new content yielded positive results, and GLUU reported positive growth for the first time in a while.
GLUU stock has continued to be red hot in 2018. Bookings growth has remained strong. New games are gaining traction. Cost-savings are kicking in. Margins are roaring higher. Indeed, management is expecting the company to be EBITDA and free cash flow positive this year.
Amidst this powerful course reversal for the company, GLUU stock has continued to roar higher. It is now up 80% year-to-date, and trading right around five-year highs.
As such, now seems like an appropriate time to ask the question: How much higher can GLUU stock go?
Depends on whether or not you believe in the mobile gaming market. I don’t really think that market has longevity alongside multi-purpose social media platforms, and as such, think GLUU stock will fall in a multi-year window.
Here’s a deeper look:
How GLUU Stock Could Go Even Higher
If you believe in the mobile games market and management’s targets for $500 million in bookings and 15%-plus EBITDA margins, then GLUU stock can go higher.
The math isn’t that hard here. Bookings were $320 million last year. They are expected to rise 14% this year to $365 million. If GLUU can maintain 10% bookings growth over the next five years, then the company should be able to get to about $515 million in bookings in five years.
At that level, management expects EBITDA margins of 15-20%. A 17.5% EBITDA margin on $515 million in bookings implies EBITDA in five years of $90 million. Stable and mature video game publishers usually trade around 15-times EBITDA. A 15 multiple on $90 million implies a five-year forward enterprise value of $1.35 billion. Discounted back by 10% per year, that equates to a year-end enterprise value target of $920 million, versus a present-day enterprise value of $850 million.
Thus, if you believe management that the mobile games market is booming and that the company’s new content will power bookings towards $500 million and higher over the next several years, then GLUU stock is presently undervalued.
Why GLUU Stock Won’t Be Higher in a Multi-Year Window
Right now, it is easy to believe the bull narrative on GLUU stock. Bookings are soaring. So are margins. The mobile games market seems to be coming back in favor. It really isn’t hard to believe that $500 million-plus in bookings and $90 million-plus in EBITDA is possible in five years. As such, I wouldn’t be surprised to see GLUU stock trend higher in the near term.
But in a longer-term window, I don’t think this euphoria will last. I think the numbers will get worse and the stock will fall.
Why? Because today’s bump feels like a near-term phenomena. GLUU made a couple of good moves in the mobile games market, and all the sudden, it is making more money from its mobile games portfolio.
But daily active and monthly active users are actually down — by a whole bunch over the past several quarters. That means less people are playing GLUU’s mobile games now than they were last year. GLUU is just collecting more money per user.
This isn’t that surprising.
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.
(NASDAQ:FB) is building out its Watch tab. Snap (NYSE:SNAP) is building out Discover to look like mobile TV. Twitter (NYSE:TWTR) is diving head-first into live-streaming. Netflix (NASDAQ:NFLX) is flirting with interactive content.
What does that mean? We are all going to spend more time in those platforms, and less time playing traditional mobile games. In the big picture, then, it is tough to see GLUU stock succeeding in a multi-year window.
Bottom Line on GLUU Stock
It is red-hot right now. And because momentum is a real thing, it will likely remain red-hot for the next few weeks to months.
But in a multi-year window, it is tough to see the bull case on GLUU stock. Social media apps are becoming more multi-purpose than ever, and GLUU likely won’t be able to compete alongside these multi-purpose social media apps which dominate mobile usage time.
As such, GLUU stock will likely trend lower in a multi-year window.
As of this writing, Luke Lango was long FB and SNAP.
