Mobile game publisher Glu Mobile (NASDAQ:GLUU) -- which rose to prominence on celebrity-backed games like Kim Kardashian: Hollywood and Restaurant Dash: Gordon Ramsay -- recently introduced The Swift Life, a new social app that stars Taylor Swift.
The Swift Life is less of a game and more of a social network for Taylor Swift fans, which lets users connect to each other via message boards and quizzes. The app, which marks Glu's first celebrity-sponsored app of 2017, will launch alongside Swift's new Reputation album later this year.
Glu's stock has roughly doubled this year, fueled by impressive (albeit unpredictable) revenue growth on new titles like Design Home, MLB Tap Sports Baseball 2017, and Covet Fashion. Glu gradually pivoted away from celebrity-backed games over the past year, but it still clearly senses opportunity in popular celebrities like Taylor Swift.
Will The Swift Life generate big numbers for Glu in the coming year? Or will it be another failed effort to replicate the surprising success of Kim Kardashian: Hollywood?
A look back at Glu's hits and misses
After striking gold with Kim Kardashian: Hollywood, which debuted in 2014, Glu launched a lot of celebrity games in a bid to catch lightning in a bottle again. This included games featuring Nicki Minaj, Britney Spears, Katy Perry, Kendall and Kylie Jenner, and Gordon Ramsay.
Out of all of those games, only Restaurant Dash: Gordon Ramsay and Kendall & Kylie achieved meaningful success, with respective lifetime revenues of about $30 million and $20 million. But that still paled in comparison to Kim Kardashian: Hollywood, which generated $72 million in revenues in 2015 and another $62 million in 2016.
Nicki Minaj: Empire, Britney Spears: American Dream, and Katy Perry Pop all bombed, indicating that social media followings -- Glu's main way of estimating a game's potential audience -- aren't a reliable indicator of future success. Instead, the success of the games tied to Kim Kardashian, the Jenner sisters, and Gordon Ramsay suggests that the link between reality TV and mobile games is stronger than the link between pop music and mobile games. This means that The Swift Life could suffer the same fate as Katy Perry Pop.
Royalties are another concern. Glu pays celebrities an average royalty rate of 20% on mobile app sales, and those expenses consume around 10% of its GAAP revenues. That percentage doesn't sound high, but it matters because Glu remains unprofitable, with its GAAP loss widening from $17.9 million to $23.6 million between the second quarters of 2016 and 2017.
Why The Swift Life feels unnecessary
Up until this point, Glu had done a fairly solid job diversifying its portfolio with non-celebrity games. Its total bookings rose 62% annually to $82.5 million last quarter, and Kim Kardashian: Hollywood only accounted for 7% of that total.
Newer titles like Design Home, MLB Tap Sports Baseball 2017, and Covet Fashion already eclipsed Kardashian's importance to Glu's top-line growth. Prior to Glu's introduction of The Swift Life, analysts expected Glu's revenue to rise 55% this year, but to cool off to 8% growth next year.
And it's faring better than industry peer Zynga (NASDAQ: ZNGA), which is expected to post 12% sales growth this year and 9% sales growth next year. Glu's trailing price-to-sales ratio of 2.5 also makes it fundamentally cheaper than Zynga, which trades at 4.3 times trailing sales.
Is Glu Mobile a Buy?
I personally like Glu more than Zynga as a mobile gaming play, but I still wouldn't buy the stock. That's because Glu isn't profitable, its revenue growth is volatile, and mobile gamers are generally less loyal to franchises than PC or console gamers.
Glu's lumpy track record with celebrity games also indicates that The Swift Life will be more of a coin flip than a sure thing. Therefore, investors who are interested in the mobile gaming market should avoid Glu and check out some safer plays instead. Check out my look at "3 Top Mobile Gaming industry Stocks to Buy in 2017," where I make the case for Activision Blizzard, Tencent, and NetEase.