Is This Stock Un-Glu-ed From Reality?

Glu Mobile (Nasdaq: GLUU  ) shareholders were in for a treat this morning. Shares jumped in late trading on reports that losses would be slightly less painful than expected. Non-GAAP revenue came in a hair over $20 million, a fairly substantial gap from GAAP revenue, which clocked in at $15.2 million. Is the company any closer to profitability? That depends on which metric you look at, but shareholders don't seem to mind for the time being. Perhaps they should.

Keeping it real
Glu's financial performance over the last few years has been nothing to write home about, but its stock price sure has been. Take a look at the disconnect that's emerged between the revenue and the reality:

It's not just revenue that's flatlined. Profits have been elusive as well:

Sources: Morningstar and Glu Mobile earnings release.

Of course, the longer trend in Glu's stock price has been profoundly disappointing, but that hasn't stopped post-crash investors from reaping big profits. What are investors expecting? It seems apparent that they're waiting for the juicy profit margins often earned by major software companies. I'm not so sure those are on the way.

Facts and figures
Long-term earnings trends don't justify the stock's rise at this point. The company's market cap, just north of $250 million, would merit a 16 P/E…  if every cent of its revenue became profit. That clearly won't happen unless the company catches lightning in a bottle.

There's always the chance that Glu could turn into the next Rovio, which turned the launching of birds into pigs into a billion-dollar marketing empire. With 53 games available, Glu has plenty of product breadth, including tie-ins to popular entertainment franchises like Family Guy and Activision Blizzard's (Nasdaq: ATVI  ) Call of Duty. But the apparent failure of multiple top-tier brand names to bring in new money makes such a strategy look unrewarding.

Building more original games helped non-GAAP gross margins grow from 73% to 87%. Based on the cheerful trajectories laid out in Glu's presentation, the company's on a rocket ride to profitability. Maybe. Despite major growth in monthly active users and daily active users, Glu's freemium model doesn't seem to be paying off. Both numbers nearly tripled from the year-ago quarter, but only about 1% of users pay, and they haven't yet affected the bottom line in a big way. Social-gaming giant Zynga (Nasdaq: ZNGA  ) has been compared to Glu, often unflatteringly -- it's hard to maintain user interest in a crowded field to which entry barriers are quite low.

Over the past two years, the company's growing smartphone revenue has essentially replaced plummeting feature phone revenue. In the first quarter of 2010, Glu earned $2.1 million and $17.5 million in smartphone and feature phone revenue, respectively. In the most recent quarter, that's shifted to $15.0 million and $5.1 million. Glu might reach profitability in time, but it'll have to do more than replace revenue streams to justify its valuation now.

Final thoughts
A few superstar games can far outclass a huge stable of also-rans, as Activision and Electronic Arts (Nasdaq: EA  ) continue to prove. EA's Sims Social assaulted Zynga's growing library of drearily similar Facebook-based titles, and Activision's relatively small roster of top-tier titles continues to throw off cash. Just because the mobile space is growing rapidly doesn't mean that every company will boom along with it.

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Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard. Motley Fool newsletter services have also recommended creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2012, at 4:28 PM, BullBearPiggy wrote:

    Sorry but is the author of this article completely in the dark about the M&A activity in this space?

  • Report this Comment On February 08, 2012, at 5:38 PM, benfran wrote:

    Hi Alex Planes

    Lazard upgraded GLUU price target to $6 today from $5. I trust them. I know you have an agenda to help the short seller friends that you have in the hedge fund community. But nevertheless take a look at Lazard's report. GLUU 's smart phone revenues and gross margins are spectacular. If it got half of ZNGA's multiples GLUU will be trading at $15.

    Thank you

    Ben

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