Why the Apple-China Mobile Deal Is Great News for Glu Mobile

Glu Mobile is a clear-cut beneficiary of Apple's China Mobile deal.

Jan 27, 2014 at 10:30AM

When Apple (NASDAQ:AAPL) and China Mobile (NYSE:CHL) finally struck a deal after six long years of negotiations, many Apple suppliers saw their share prices jump in anticipation of more business. However, one of the most unlikely beneficiaries of this deal could be mobile gaming company Glu Mobile (NASDAQ:GLUU). Surprised? Well, you shouldn't be.

A big market opens up
With 64% of revenue coming from Apple's app store in the third quarter, the China Mobile deal opens up a whole new avenue for Glu Mobile. China Mobile gives both Apple and Glu access to 767 million subscribers. Initial signs have been promising, as iPhone pre-orders through China Mobile exceeded 1 million, and Cantor Fitzgerald analyst Brian White expects the two behemoths to move around 24 million units this year.  

With iPhone sales expected to see a considerable boost in China this year, Glu must be thanking its stars as mobile gaming is growing at a rapid pace in the Middle Kingdom. According to Alibaba, the mobile gaming market in China grew a massive 247% year-over-year in 2013 to $1.9 billion. With annual revenue of around $100 million, Glu surely has a lot of space to flex its wings in this market, and the company has been taking some steps to make the most of Chinese gaming.

Glu's moves in China
In 2011, Glu had entered into a distribution partnership with a Hong Kong-based company, TOM Group. The two companies intended to build a big gaming portal for Chinese customers, and Glu has continued pursuing such opportunities. The company is aggressively focused on making the most of the Chinese gaming opportunity, and it even has an office in Beijing to help grow its business.  

Glu is also in a partnership with Chinese Internet services company Qihoo 360, which is known for its security products. Qihoo operates one of the largest Android app markets in China, and this should complement Glu's revenue from Apple's app store.  

A robust pipeline
Unsurprisingly, Glu recognizes China as one of its most important growth markets, and the company might launch as many as 18 games this year to target it. When Glu reported its results in October, the company disappointed investors by delaying the launch of two of its games -- Frontline Commando 2 and Motocross Meltdown -- to the current quarter. However, in hindsight, this might turn out to be a good move, as the two games will be launched after iPhone sales begin in China.

Moreover, the probability of success of these games might increase due to the delay, since Glu would include insights that it had gained from its blockbuster game last year -- Deer Hunter 2014. Also, Glu recently launched RoboCop, a game based on the MGM film.  

The company seems to have a strong pipeline in place this year, and China Mobile comes as an additional tailwind. If Apple manages put around 24 million iPhones into the hands of Chinese consumers this year, as analysts expect, Glu should see a bump in revenue owing to the popularity of its games on the iOS platform.

A bright road ahead
Analysts are also quite optimistic about Glu's prospects. Over the next five years, Yahoo! Finance data suggests that Glu's earnings will grow at an annual rate of 30%. The company is set to release its fourth-quarter results in the first week of February and is expected to report 55% year-over-year growth in revenue. What's more, Glu expects to hit break-even on the bottom line, as compared to a loss of $0.05 per share in the year-ago period. 

The company seems to have reclaimed its growth trajectory after struggling for some time last year, and a robust outlook for the ongoing quarter should boost investor confidence further. All in all, Glu has a lot going for it and could turn out to be a winner this year. 

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. 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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