There is a Way to Invest in Volatile Game Developers like Glu Mobile

Summary

GLUU is involved in a business model that requires a portfolio approach, as their CEO mentioned last year

GLUU’s stock price often moves based on expectations, if not rumors, and it often has no relationship to the fundamentals

The only way, it seems, to invest in a company like GLUU would be to build a portfolio of similar companies

Company Overview

San Francisco based Glu Mobile Inc (NASDAQ:GLUU) is a smartphone video game maker. Their business model is based on developing games and distributing to global users for free. The bulk of Glu Mobile Inc’s revenue comes from in-game purchases by users.

Although the company was founded back in 2001, they have successfully adapted to the new age gaming industry on small screen and currently considered to be one of the leading game makers on various platforms, including Android, iOS, Windows Phones, and Mac OS.

Glu Mobile Inc is the company behind a lot of popular mobile games such as Contract Killer, Cooking Dash, Deer Hunter, Diner Dash, Eternity Warriors, Frontline Commando, Gun Bros and Heroes of Destiny.

Over the last few years, Glu Mobile Inc management has increased focus on creating games that incorporate third party licensed brands to attract users. For example, they have games that utilized brands such as Kim Kardashian: Hollywood, Kendall and Kylie, Katy Perry Pop, James Bond: World of Espionage, Mission Impossible: Rogue Nation and Sniper X with Jason Statham.

As of July 20, 2016, Glu Mobile Inc had a market capitalization of $339.79 million and employed around 750 people in its offices located throughout various regions around the world.

Understanding the Business of Glu Mobile

Glu Mobile Inc is trying something that many have tried even before the dotcom bubble. Offering something for free in hope that they will buy additional features or services at the end.

Web hosting companies who offer free space, with the hope that users will later upgrade and pay would be a good analogy to consider when understanding the business model of companies like Glu Mobile Inc.

While many businesses are considering the freemium model, Glu Mobile Inc has actually evolved, in a pure marketing sense, to make it more glamorous by incorporating celebrities and has been reaping the benefits for the last few years.

Currently, Glu Mobile Inc has rights to make games about celebrities, collectively these celebrities have over 1 billion followers.

However, like the movie business, not all games are hit and often loses money. The end-game would be to have a positive average income from all the investments and the freemium game developers have a pretty bad track record.

For example, the bulk of the $223.1 million revenue of Glu Mobile Inc in 2015 came from the “KIM KARDASHIAN: HOLLYWOOD” game and its iOS version. But, other games like “James Bond: World of Espionage” did not do well in terms of generating revenue.

The CEO of Glu Mobile Inc, Niccolo De Masi, understands what he is doing and actually admits that having a portfolio of games is the only way to play this business strategy. “Every game we make is obviously not going to be at the top of the grossing charts at the same time,” said Mr. Masi in an interview with VentureBeat back in December 2015.

How to Invest in Freemium Game Developers

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Figure 1: Since Pokémon GO became the sensation, Nintendo’s stock price almost doubled

Since it is a hit or miss strategy, nobody – regardless of how well their market research is – can predict which game will become the winner or at least break even. For example, industry analysts knew Nintendo was about to bring in the Pokémon GO, still their stock price did not gradually go up for several months in anticipation of its success. The price went from $17.5 per share to $35 per share within a month in June 2016.

It is not only difficult to predict the directional movement of stocks like Glu Mobile Inc, it is nearly impossible.

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Figure 2: Glu Mobile Inc’s Stock is Too Volatile for Conservative Investors

As a highly volatile stock, with a Beta of 2.76, Glu Mobile Inc can go up anytime, like it did on July 18 or it can suddenly fall, like it did the next day – on July 19.

If you are not yet convinced that investing in Glu Mobile Inc would be a roller coaster ride, then consider the following price chart of the company.

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Figure 3: Glu Mobile Inc’s Stock Price is Often Have No Correlation to Fundamentals

Over the last five years, often the fundamentals of the company had no correlation to its stock price. In 2012, the stock price went up in anticipation of a higher revenue, which Glu Mobile Inc failed to deliver. Then when they did deliver the revenue growth in 2015 and their stock price rallied, they failed to generate any meaningful net profits. As a result, a slight drop in the quarterly revenue translated into a 50 % reduction in market capitalization in the last two quarters of 2015.

No serious institutional investor would consider having only Glu Mobile Inc just because of the volatility of the price.

However, there is a way for secondary investors to play this game.

As companies like Glu Mobile Inc wants to build a portfolio of games, investors too can consider to build a portfolio consisting of several game developers who are applying the freemium business model in this industry.

Conclusion

No amount of fundamental analysis would be ample to minimize the downside risk of investing in a company like Glu Mobile Inc. To do so could turn out to be really good or catastrophic. There is no way of predicting what will happen next.

The aim of this analysis is not to predict where the stock price of Glu Mobile Inc would end up in the next two quarters, but to open a discussion among investors who has exposure to these kind of companies.

Do you already have a stake in Glu Mobile Inc? If yes, then are you already approaching this industry with a portfolio or doing comparative analysis to allocate funds to buy stocks of specific companies?