What happened
Shares of Glu Mobile (GLUU +0.00%) dropped 10% last month, according to data provided by S&P Global Market Intelligence.
The stock plunged after news surfaced that Chinese tech giant Tencent sold a quarter of its stake in the company recently. This news came on top of a sharp sell-off in May, following a first-quarter earnings report that fell short of investors' expectations.
IMAGE SOURCE: GETTY IMAGES.
So what
Tencent is the largest video game company in the world by revenue and has acquired stakes in several video game companies, including Activision Blizzard and Ubisoft Entertainment. The news that the Chinese gaming giant had sold a portion of its stake certainly didn't help investor confidence, especially after a first-quarter earnings report that showed a slight sequential decline in bookings in one of the company's core titles, Design Home.
However, Tencent still owns 21 million shares of Glu Mobile, which is 14.46% of the company. The tech giant is a large company with $48 billion in trailing-12-month revenue spread across social media, cloud, mobile payments, and gaming. The company obviously has many uses for its cash, and given that it still has a significant stake in Glu Mobile, the sell-off in the stock last month might have been too extreme.
Now what
The stock got a brief bounce in early June when Wedbush Securities analyst Michael Pachter upgraded the stock to outperform, citing growth catalysts in the near term with new games on the horizon that should lift the company's profitability. One title that is expected to perform well is Disney Sorcerer's Area, which management believes will drive long-term engagement and user retention.
Glu Mobile has been showing strong growth in revenue over the last year. Management believes they are on track to make Glu Mobile a consistent performer on both the top and bottom line. The mobile game maker showed good progress last quarter, with the company showing a small profit of $0.7 million in net income compared to a net loss in the year-ago quarter.
Currently, analysts expect adjusted earnings to come in at $0.35 per share this year and grow 15% per year over the next five years. The stock trades at 20 times this year's consensus earnings estimate.
