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Don’t Watch the Glu Mobile Stock Financials, Watch the Gaming Trends

Glu Mobile (NASDAQ:GLUU) has recovered nicely from the slump following its February earnings report. Over the last four weeks, Glu Mobile stock saw a massive surge higher. It now trades more than 10% above the pre-earnings levels seen in early February.

Glu Mobile stock gluu stock

Source: Shutterstock

Glu Mobile stock has built its success based on its licensing deals, the performance of its games, and the return to profitability.

However, the history of mobile games shows that game performance drives mobile gaming stocks. Hence, understanding its games will play a more important role in succeeding with GLUU than studying company financials.

Here’s What Drove GLUU Stock Higher

In my post-earnings report, I described GLUU stock as a “buying opportunity for risk-taking investors.” GLUU rewarded those who took the risk handsomely. Since the 13.2% post-earnings plunge, the stock has risen by over 29%.

Titles such as Kim Kardashian: Hollywood, Design Home, and Tap Sports Baseball have kept mobile gamers glued to their screens. The company also agreed to develop games for Disney (NYSE:DIS), using characters from Pixar and the programs Disney developed in-house. This brought about Disney Sorcerer’s Arena and will lead to more games in the near future.

Fundamentals also remain compelling. Analysts expect profits to increase by 25% this year and 40% next year. That type of growth makes the 23.3 forward price-to-earnings (PE) ratio appear reasonable.

Unfortunately, these metrics remain secondary.

GLUU Games Drive GLUU Stock

The numbers matter with regard to the company’s health itself. However, for GLUU stock to succeed, these numbers take a back seat to the success of its games. Games pulled GLUU out of penny-stock status. They also helped it recover after an underwhelming earnings report.

However, investors still need to take heed of the history of the gaming industry. In all likelihood, instead of trading like an Activision (NASDAQ:ATVI) or an EA (NASDAQ:EA), GLUU stock will most likely mirror that of its closest peer, mobile gaming company Zynga (NASDAQ:ZNGA).

The Lessons of Zynga

Zynga rode high in the early part of the decade on the success of Mafia Wars and Farmville. This took ZNGA stock to almost $16 per share in March 2012. However people began to log on to Zynga games less often, and by the end of 2012 the stock had fallen below $2.50 per share as the gaming platform lost almost half of its user base.

With GLUU stock trading at over $11 per share, I see a similar fate as the company’s greatest threat. Hence, to succeed with Glu Mobile stock, do not study PE ratios and cash flow statements. Instead, explore the games themselves and their performance.

Like with Zynga’s experience with Farmville, at some point, gamers will eventually grow weary of titles such as Design Home and Tap Sports Baseball. For GLUU stock to enjoy long-term success, the company needs to make sure the interest shifts to one of GLUU’s other games when this happens.

If the company can continually pull off this transition, Glu Mobile stock will continue to rise. However, if it fails in this area, GLUU could return to penny-stock status.

Final Thoughts on Glu Mobile Stock

Hence, the user base stands as the most critical metric in predicting the performance of GLUU stock. GLUU rose from penny-stock status on a handful of successful games. It now seeks to build on that base by partnering with Disney and designing games built around the media giant’s characters.

Despite the potential for that partnership, GLUU stock remains primarily dependent on growing and maintaining its user base. GLUU investors need to stay mindful of the lessons of Zynga and what happens when players become bored with a specific game. Even though they have enlisted a powerful partner in Disney, it still faces constant pressure to keep users coming to the Glu Mobile platform.

GLUU can keep moving higher if its games remain popular. However, if one cannot develop an interest in Glu Mobile games, they should not buy an interest in GLUU stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

Article printed from InvestorPlace Media,

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