Is Glu Mobile, Inc. 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 Mobile'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 Mobile's key statistics:

GLUU Total Return Price data. Source: YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

GLUU Return on Equity (TTM) data. Source: YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Glu Mobile appears to be moving in the right direction since we first looked at it last year, as the mobile game developer picked up two more passes to earn a nearly perfect six-of-seven score in its second assessment. However, the company continues to struggle with negative free cash flow and net income, which has resulted in a 50% increase in share count as Glu has chosen to dilute existing shareholders to continue to fund its operations. How might Glu be able to push these vital metrics into positive territory to earn a rare perfect score next time? Let's dig a little deeper to find out.

Glu has consistently outperformed analyst expectations over the past few years, but shareholders have apparently soured on the lack of apparent growth on Glu's bottom line -- neither revenue nor free cash flow has improved in three years. While the company recently posted better-than-expected revenue and earnings per share for its first quarter, Glu's shares have been erratic this year. Before a huge pop sent shares up nearly 30% in a week following an announcement that Glu would support Android TV, it appeared that the stock would end its 2014 roller-coaster ride back where it began.

Glu has also signed an agreement to purchase Dash series game maker PlayFirst for about 3 million shares worth $13 million, which may provide solid top-line growth over the coming months. However, investors were frightened by the announcement of a new secondary offering of 8.6 million shares since Glu priced the offering at a significant discount to its then-current share price. The company plans to utilize those proceeds to finance the acquisition of PlayFirst and support ongoing operations, which has been its general strategy with secondary issues over the past few years.

Glu has a lucrative opportunity in the fast-growing mobile gaming market. Foolish writer Mukesh Baghel points out that the introduction of new form factors (a phablet or a larger phone) should drive demand for games on Apple's (AAPL -2.19%) App Store, which accounts for a major chunk of Glu's total revenue. Glu currently boasts a diverse stable of mobile games, including Contract Killer 3, Hercules, and Tap Sports: Baseball.

The company also plans to diversify its customer base by adding free-to-play mobile game James Bond, which is slated for release in a year -- Glu teamed up with EON Productions and MGM Interactive to develop the first free-to-play mobile game in the Bond franchise's history. On the other hand, Apple's recent move to enforce 17-plus age ratings standards for shooter apps would adversely impact the availability of some of Glu's top-selling franchises.

Moving in the other direction, Glu has also released a game called Kim Kardashian: Hollywood, which seems to be part of the reason for the company's latest share-price spike, as Investor's Business Daily notes a 32% gain since the game's release. In keeping with the whole Kardashian theme of fame as a business model, users are urged to spend a lot of (real) money improving a cartoon avatar's appearance and social connections until it becomes a huge celebrity. The most prominent example of this ridiculous concept comes from a recent post on girl-power blog Jezebel by writer Tracie Egan Morrisey titled "Oh God, I Spent $494.04 Playing the Kim Kardashian Hollywood App." Morrisey has the benefit of a Gawker expense account in this case, but this sort of profligate spending is undoubtedly music to Glu shareholders' ears -- even if they may recoil in horror at the idea of actually spending so much money on a game designed to make users feel like Kim Kardashian.

My fellow writer Alvaro Campos notes that Glu plans to continue its user-acquisition campaign with Deer Hunter 2014 and Eternity Warriors as it prepares to launch new franchises this year. However, the company could fierce competition from rival game developer Zynga's (ZNGA) Farmville 2: Country Escape, which has been promoted to Google Play's top tier and Apple App Store "Editor's Choice," to say nothing of the other well-known games in Zynga's stable. Zynga has been making substantial investments in developing games in several new categories to boost its overall presence on mobile app stores.

Putting the pieces together
Today, Glu Mobile has many 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.