Why Shares of Glu Mobile, Inc. Continue Rallying

Shares of mobile games publisher Glu Mobile (NASDAQ: GLUU  ) are trading at 52-week highs. The company's stock went up more than 13% in the past few trading days, on the back of Glu's new hit game, Kim Kardashian: Hollywood. Year to date, Glu's shares are up more than 50%, outperforming most players in the social and mobile gaming industry, such as King Digital Entertainment and Zynga (NASDAQ: ZNGA  ) . What is driving Glu Mobile's shares up?

Source: Glu

Glu Mobile has experience and the right focus
It's no secret that the gaming industry is a hit-or-miss business. But Glu Mobile appears to have found the way to constantly produce game hits, as evidenced by its recent releases.

Founded in 2001, the company has been developing mobile games for a long time, but it was not until last year that its games became extremely popular.

Since its foundation, Glu Mobile has developed games for various formats, including feature phones. However, the company eventually decided to focus on a particular niche: freemium games. In terms of technology, the company focused on developing impressive 3D graphics. It also paid importance to developing its own intellectual property.

Great results
Glu Mobile appears to have chosen the right focus. In the most recent quarter, the company reported revenue of $47 million, well above the Street consensus of $39.4 million. More important, after a long history of losses, the company announced positive net income of $0.06 per share versus a consensus estimate of $0.02. 

Glu Mobile was able to deliver strong earnings because of the success of Deer Hunter 2014, which reached the first place in the free games ranking on the iPhone, iPad, and Android platforms soon after its release. 

Just the beginning?
The massive success of Deer Hunter 2014 appears to be only the beginning of Glu Mobile's story. The company's most recent hit is called Kim Kardashian: Hollywood. Since its release on June 25, the game as risen to the third place among most-downloaded free games at Apple's U.S. App store, and Glu Mobile's CEO said recently this title may well be the company's biggest hit this year.

The Kardashian game allows players to customize the look of their own character, who works at a clothing store in Los Angeles. In the game, the character meets a virtual Kim Kardashian, who takes the player's character inside Hollywood, while providing advice on how to become an A-list celebrity. 

The game could become a revenue-generating machine, because users get easily hooked on in-app purchases, such as virtual clothing. According to Bloomberg, users can spend up to $99.99 real dollars for $175,000 virtual dollars, which can be spent on virtual necklaces, clothes, trips to Beverly Hills, etc. According to Cowen Group's analyst Doug Creutz, revenue for this game could reach $200 million in 2014, making it one of the most profitable titles on the App Store.

What Zynga could learn from Glu Mobile
When it comes to producing mobile games, Zynga could learn a lot from Glu Mobile. Zynga originally put a lot of strength into developing games for the Facebook platform, but it recently has shifted its focus to mobile, as gamers spend more time on their smartphones than on Facebook. In the first quarter of 2014, Zynga's mobile audience jumped 45%, thanks to the acquisition of mobile gaming company NaturalMotion, and the release of a new version of Farmville for Apple and Android devices.

Going forward, Zynga could increase the probability of developing hits by copying some of Glu Mobile's methods, such as specializing on a particular technology (3D), or inserting well-designed social mechanism (Deer Hunter) or famous celebrities (Kim Kardashian) to the games.

Final Foolish takeaway
With more than ten years of experience developing mobile games, Glu Mobile appears to have finally discovered the formula for producing successful hits. The company's latest release,  Kim Kardashian: Hollywood, could go beyond Deer Hunter 2014 and generate as much as $200 million in revenue.

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Victoria Zhang

I'm an economist, coffee addict and value investing fan. My obsessions include fashion, online retail, traveling, disruptive technology, and Asia.

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