Most mobile games struggle to generate consistent profits, but under CEO Nick Earl, Glu Mobile (NASDAQ:GLUU) seems to have the right formula. Since Earl took over the company's reins in 2015, the stock is up 195%.

The company is still trying to establish a foundation of profitability after years of losses, but Glu Mobile just reported a small profit in the first quarter, which shows Earl's plan to turn it into a consistently profitable company is on schedule. But it's not out of the woods yet.

The stock is down 37% in the last three months after the most recent quarterly report showed a sequential decline in revenue from one of its top three games. However, the company still reported solid growth overall, with its top three games collectively growing bookings -- a non-GAAP (adjusted) measure of revenue -- by 30% year over year. 

A young woman playing a game on a smartphone.

Image source: Getty Images.

The next year or so will be pivotal for the small mobile game company. It plans to launch as many as six titles through 2020, which management believes will grow bookings and set the stage for continued improvement on the bottom line. 

The secret to success

The first year under Earl in 2016, Glu Mobile reported a loss of $87 million. Since then, its net loss has narrowed to just $5 million over the last 12 months, and revenue has nearly doubled to $381 million. 

The improvement stems from Earl's transformation of the company's culture to a more creative work environment. For example, he relocated the company's studios under one roof in San Francisco so game designers can communicate better and share best practices. 

Another key move by Earl was to focus the company on original franchises and shed the celebrity-driven hits, such as Katy Perry Pop and Britney Spears: American Dream, that were money losers. 

Glu is increasingly avoiding one-hit wonders, and instead directing resources to create what it calls "growth games" that can consistently grow revenue every year.  A good example is Covet Fashion, which came to Glu Mobile along with the acquisition of CrowdStar a few years ago. The game generated $53.4 million in bookings last year, up 28% year over year. That's impressive for a title that was launched in 2013 -- the mobile equivalent of the stone age. 

Led by an industry veteran

Earl brings extensive knowledge about how to grow a mobile game business. He used to work for Electronic Arts and was senior vice president at EA Mobile. He helped EA transition from pay-to-play games to free-to-play, where a game is given away and makes money from in-app purchases. It's a tricky model to nail down, but Glu Mobile is one of the few mobile game makers that is succeeding.

Total bookings increased by 20% last year based on the growth of three titles -- Covet Fashion, Design Home, and Tap Sports Baseball -- which are the company's three growth games. Those three titles accounted for 74% of total bookings last year. 

Earl doesn't see the reliance on three titles as a weakness, but as a testament to the kind of business he wants to create: one that consistently releases a new title that can survive on the marketplace for years and years, generating consistent profits from sales of additional content.

The pipeline is filled

The next 12 months will prove crucial to Glu's growth strategy, as the company is set to release several new titles. Three games are releasing this summer -- WWE Universe, Diner DASH Adventures, and Disney Sorcerer's Arena. There are high expectations for the last one, given the brand recognition of Disney.

Three more games are in development for release in 2020. One is an original franchise developed by the same studio that created Kim Kardashian: Hollywood -- the one celebrity game that has performed well for Glu Mobile. The new title will be in beta before the company's second-quarter earnings conference call.

Additionally, Glu Mobile is working on a new title within the Deer Hunter franchise, with a third title being created by the studio that created the successful Covet Fashion.

The stock could bounce back over the next year

Despite the stock's poor performance in recent months, analysts remain bullish on the company's growth prospects. Wedbush just upgraded the stock to outperform in early June, citing the above growth catalysts with the new releases. 

The consensus analyst estimate calls for growth of 25% in adjusted earnings this year, while revenue is expected to increase by 17% in 2019 and 16% in 2020. 

What's more, the stock's decline has brought the valuation down to a more reasonable level -- about 20 times this year's earnings estimate. That's not bad for a company that analysts expect to grow earnings by 15% per year over the next five years. 

Glu will be a good investment at today's price level if the new titles releasing over the next year prove their worth. Given the company's performance over the last few years and Earl's extensive experience, there's no reason to doubt it will be generating higher revenue and profit this time next year, and that could mean a higher stock price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.