Mobile gaming company Glu Mobile (NASDAQ:GLUU) has been on fire in 2018. A comeback in the mobile gaming market has coupled with a re-imagined Glu gaming portfolio, and powered robust bookings growth so far this year. This robust growth has pushed GLUU stock up 70% year-to-date.
With GLUU stock trading above $6, it’s essentially at a decade high.
But, at decade highs, GLUU stock looks susceptible to a pullback — Wednesday’s overall market move, notwithstanding. The stock has made similar big rallies towards $6 and higher before over the past 10 years. Each time, the rally was short-circuited, and GLUU stock fell back to $4 or lower in a hurry.
History will repeat itself here.
Underlying trends in the mobile gaming market aren’t that strong. The number of people playing mobile video games continues to drop, and at an accelerated rate, despite rising smartphone usage. This usage decline will eventually catch up with Glu Mobile and investors can look for GLUU stock to fall in a big way.
Why Glu Mobile Stock Could Head Higher
Glu Mobile has had a really good year as its new portfolio of growth games, including Design Home, TSB Franchise, and Covet Franchise, have powered robust bookings growth. In Q1, bookings rose 25% year-over-year. In Q2, they added 20% year-over-year.
Thanks to reinvigorated bookings growth, GLUU stock has taken off like a rocket ship. From this perspective, the bull thesis is pretty simple: If the company can maintain healthy double-digit bookings growth, Glu Mobile shares will continue to head higher.
Management thinks that is possible. They have set long-term targets of $500 million in bookings and EBITDA margins of 15-20%. Assuming 10%-plus bookings growth into perpetuity, Glu Mobile will likely hit those targets within 5 years.
Thus, in 5 years, Glu Mobile could be looking at $500 million in bookings and roughly $90 million in EBITDA. Stable and mature video game publishers usually trade around 15X EBITDA. A 15X 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 $830 million.
So, if you believe management that the mobile games market is booming and that the company’s new content will power bookings to $500 million and higher over the next several years, then GLUU stock is presently undervalued.
Why GLU Stock Most Likely Won’t Head Higher
Unfortunately, I think management’s long-term targets are unreasonably optimistic.
In simple terms, the mobile video game market is dying. 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. Thus, despite an increase in overall phone time, mobile video game time is actually dropping.
Why? Because average consumers don’t have a need for mobile video games. 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.
This problem is only going to get bigger, meaning that the mobile video game player market is only going to get smaller.
Facebook (NASDAQ:FB) is building out its Stories functionality. 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. Instagram has IGTV. Communication apps are starting to integrate P2P games.
Bottom Line on GLUU Stock
Everywhere you look, non-gaming apps are becoming more gaming-like. Thus, in a long-term window, I see the mobile video game market continuing to shrink. It will be tough for Glu to post 10%-plus bookings growth into perpetuity in a shrinking market. That would require the mobile players who stay to keep spending more and more. At some point, those players will reach a max spend, and overall bookings growth will flat line.
I don’t think we are too far off from that happening. As such, I don’t think we are too far off from GLUU stock topping out.
The story at GLUU is great right now. But, it won’t remain great forever. Eventually, the shrinking of the mobile video game market will catch up to GLUU, and when it does, GLUU stock could drop in a big way.
As of this writing, Luke Lango was long FB, TWTR, and NFLX.