Glu Mobile (GLUU +0.00%) stock was looking all set for a turnaround going into its fiscal 2019 third-quarter earnings report, and the mobile gaming specialist didn't disappoint. The company's latest results make it clear that the weakness it experienced earlier this year was temporary, and its titles haven't lost their mojo as feared.
Glu's revenue increased 8% annually in the third quarter to $107.1 million, but more importantly, bookings shot up 20% to a quarterly record of $120.4 million. The bookings number was well ahead of the $111 million estimate Glu had provided three months ago when the company had to slash its full-year bookings guidance as one of its titles failed to hit the ground running.
Now that Glu seems to have put its problems in the rearview mirror, it may be a good time to go long on this beaten-down mobile gaming stock. Let's see why.
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Glu's top games are on fire
Glu's impressive bookings growth during the quarter was driven by its three growth titles -- Design Home, Tap Sports Baseball, and Covet Fashion. These three titles enjoyed a combined 17% annual jump in bookings and accounted for 77% of Glu's total bookings during the quarter. The new games the company launched this year accounted for 13%, or $16.2 million, of total bookings.
The strong performance of Glu's new games -- Diner DASH Adventures in particular -- was more than enough to offset the nearly $10 million decline in bookings from the company's legacy games. Diner DASH Adventures alone generated $14.7 million in bookings for Glu last quarter.
Glu is now gunning to convert Diner DASH Adventures into a growth title. The company believes that this game can deliver sustained growth without much investment in the long run. CFO Eric Ludwig pointed this out on the latest earnings conference call: "We believe that Diner DASH Adventures has the telltale signs of a long-term success as evidenced by strong retention engagement and monetization."
Glu has already kicked off the process of turning this game into a long-term money-spinner by scaling down its user acquisition spending on the title to a stable level. Such a move should have a positive impact on the company's margin profile going by the trend seen in the previous quarter.
In the third quarter, Glu's gross margin increased to 64.7% from 61.2% in the prior-year period. The number should ideally head north in the coming quarters thanks to the lower spending on Diner DASH Adventures. Not surprisingly, Glu predicts that its adjusted EBITDA will increase substantially in the fourth quarter of 2019 on a sequential-quarter basis.
The company has delivered adjusted EBITDA profitability for seven quarters on the trot. Glu's third-quarter adjusted EBITDA came in at $9.2 million, which translates into a margin of almost 8.6%. More importantly, Glu estimates that it will exit fiscal 2020 with a much stronger adjusted EBITDA margin of "at least 15%." Such a performance should result in a stronger earnings performance next year, which makes Glu a solid bet at current levels, as it seems capable of walking the walk.
What makes the stock an enticing bet?
Analyst estimates compiled by Yahoo! Finance predict that Glu's earnings could go up from an estimated $0.25 per share this year to $0.34 per share in fiscal 2020. Don't be surprised if Glu manages to hit that target, considering the adjusted EBITDA margin growth it plans to achieve and the strategy it has drawn up to get there.
Glu anticipates that its growth games will clock bookings growth in the high single digits next year. Meanwhile, a full year of contribution from Diner DASH Adventures will be another tailwind for the company.
However, the success of Glu's new titles -- Disney Sorcerer's Arena, Originals, and Deer Hunter Next -- will be critical next year. Glu anticipates low-single-digit growth in 2020 excluding these new titles.
The company will launch Disney Sorcerer's Arena late in the first quarter of 2020, followed by the remaining two titles later in the year. As such, investors will have to take a leap of faith and bet on the success of Glu's new games.
The good news is that making a bet on Glu Mobile stock seems like a no-brainer right now given its valuation. Its trailing price-to-earnings (P/E) ratio of 19 is half the five-year average multiple of over 37. Assuming that Glu can achieve its potential margin and earnings growth next year driven by the success of its new titles, buying it at its current valuation would be a savvy move given the stock's growth potential.
