Is Glu Mobile Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Glu Mobile (GLUU) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Glu's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Glu's key statistics:

GLUU Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q4 2009.

GLUU Return on Equity data by YCharts.

Source: YCharts. *Period begins at end of Q4 2009.

How we got here and where we're going
Four out of seven passing grades isn't a bad showing, but Glu comes with some obvious shortcomings, particularly on its bottom line. In three years, the mobile game developer has failed to reach profitability, and what's worse, narrowly positive free cash flow has collapsed (relatively speaking), forcing a doubling of the share count over the three-year period. What will it take to push Glu over the top and into profitable territory?

If the company's strategy is any indication, real-money gaming is the future. It's hardly the first downtrodden game developer to jump on the Vegas bandwagon -- Zynga (ZNGA) has been moving in the same direction for months, and recently secured a license from Nevada for real-money gaming. The similarities between the two companies have prompted copycat movements in share prices and tactical responses from Glu's management saying, as my colleague Rick Munarriz put it, "I'm not Zynga, dude!" That may be true, but both companies have rebounded from their 2012 lows largely on the hope of big bucks from real-money bets.

Beyond that anticipation, there hasn't been much reason to get excited about Glu's mobile offerings. Freemium games live and die on the hitmaking top-app charts on Android and iOS devices. Glu's got dozens of offerings, but none of them show up on either Android's or iOS' top lists, whether it's free, paid, or simply top-grossing, which would be the best place for a freemium game to show up.

The first-mover advantage (Glu has been developing mobile games for years before the smartphone era) is meaningless in gaming, as it's all about your latest hit -- and the big studios are catching on with gamers on mobile just as they have on consoles and PCs. Beyond the expected Angry Birds hits, you can find multiple offerings from Disney's (DIS 0.18%) game studio, as well as several Electronic Arts (EA 0.79%) hits, on both iOS and Android platforms. In fact, there are more games from each of these developers on the top-games charts right now individually than there are from Glu and Zynga combined -- really just Zynga, as Glu doesn't chart in nearly any case. Disney's deep roster of creative properties has been a big hit with mobile gamers, and EA has been pushing hard to translate its console successes to the smaller screens.

Glu might be able to generate more money from real-money, but the competition will be just as fierce there as it is in mobile gaming today. Will major casino operators sit back while game developers horn in on their racket? Closer to home, will Zynga sit idly by while Glu tries to pluck dedicated batters from its player roster?

Putting the pieces together
Today, Glu Mobile has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.