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This Small-Cap Stock Could Win Big in 2020

By Harsh Chauhan - Jan 21, 2020 at 11:18AM

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New games and the continued success of existing titles make Glu Mobile a top pick this year.

With a forgettable 2019 now in the rearview mirror, Glu Mobile (GLUU) investors will be hoping for a turnaround in the mobile gaming company's fortunes in 2020. Glu struggled last year after one of its games misfired, and investors didn't waste any time hitting the panic button.

Glu's failure might seem surprising given that it was coming off a terrific 2018. But investing in small-cap stocks is fraught with risk, as they tend to be 25% more volatile than large-cap stocks over a business cycle. So 2019 showed us exactly why investors need to be on their toes: Any misstep by a small-cap player can cost investors dearly thanks to the higher degree of risk attached.

But the upside to investing in small-cap stocks -- those with market caps between $300 million and $2 billion -- is that they can deliver above-average returns. And there are reasons to believe that Glu Mobile could do the same this year. Let's see why.

Hand drawing stock chart return.

Image Source: Getty Images

The mobile gaming opportunity

Glu Mobile plies its trade in the fastest-growing segment of the video gaming market. According to Newzoo, the mobile gaming market was on track to jump 9.7% annually in 2019 and account for 46% of the overall market, which reportedly grew 7.2% during the year. What's more, global mobile gaming revenue is expected to clock a compound annual growth rate of 11.2% through 2022, according to Newzoo's estimates.

Now, mobile gaming is an extremely competitive industry. The number of gaming apps available on the Google Play store, for example, increased from around 289,000 at the end of the fourth quarter of 2018 to nearly 350,000 by the third quarter last year, according to data collected by Statista.

This means that in a space of just nine months, over 60,000 new gaming apps were made available for the Android ecosystem. So mobile gamers have a wide range of options to choose from. The continued success of a game is not guaranteed either, as user preferences tend to change quickly as new titles hit the market and go viral.

In such a scenario, it's important for mobile game developers to remain nimble so they don't lose customers whenever fresh competition rears its head. Glu Mobile has been doing exactly that to ensure that it builds up a sticky customer base.

Glu Mobile is pulling the right strings

In 2017, Glu Mobile switched to a platform-centric strategy, building titles it hoped would generate sustainable revenue. According to this strategy, Glu started developing games that would require low investments in the long run but still generate solid revenue. The strategy has worked wonders over the past three years, boosting the company's revenue and gross margin significantly.

GLUU Revenue (TTM) Chart

Data by YCharts

The company is still sticking to this model even now. Three of its titles -- Design Home, Tap Sports Baseball, and Covet Fashion -- accounted for 77% of the company's bookings last quarter. What's more, they delivered a 17% increase year over year in bookings during the same period. The impressive thing to note here is that the Tap Sports Baseball franchise is now in its sixth year, and it managed to record 22% annual bookings growth.

Covet Fashion, which came into Glu's control in late 2016 after the company's acquisition of developer Crowdstar, saw 28% annual bookings growth during the quarter. Design Home was also launched in late 2016, and it still managed to deliver 10% annual bookings growth last quarter.

The good news for Glu Mobile investors is that the company is now betting on Diner DASH Adventures to become its fourth sustainable title. Launched in 2019, Diner DASH Adventures generated $14.7 million in bookings and was the fourth-largest title by bookings for Glu Mobile in the third quarter of 2019. The really impressive thing to note here is that the company reduced its user acquisition spending on this title throughout the quarter. CFO Eric Ludwig pointed this out on the latest earnings conference call:

As we guided to on the last earnings call, we increased UA [user acquisition] to support the early success of Diner DASH Adventures. Our UA investment in this title, as expected, scaled down from July to October, and we are now at a relatively steady state of spend.

This means that the title is enjoying strong customer retention and engagement already, and this has encouraged Glu to turn Diner DASH Adventures into a long-term growth driver like the other three titles. Not surprisingly, Glu Mobile has witnessed a sharp jump in its average bookings.

Chart showing Glu Mobile's average bookings per user.

Source: Glu Mobile Investor Presentation. ABPDAU = Average bookings per daily active user, ABPMAU = Average bookings per monthly active user.

Investment banking firm SunTrust Robinson Humphrey recently initiated coverage on Glu Mobile stock with a buy recommendation. Glu is capable of delivering impressive upside going forward, as it has more titles in the cards this year that could boost its results and make it a top growth stock for 2020.

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