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This Expensive Growth Stock Can Keep Running Higher

By Harsh Chauhan – Updated Jun 17, 2020 at 8:13AM

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A spike in demand for mobile video games has turned out to be a tailwind for this company.

Glu Mobile (GLUU) has turned out to be a winner this year as COVID-19-related shutdowns and shelter-in-place orders have confined people to their homes to contain the spread of the disease.

The mobile gaming specialist delivered a solid set of results in early May along with attractive guidance, and it hasn't taken long for the company to upgrade its expectations. Glu Mobile recently enhanced its bookings guidance for the second quarter of 2020. It now anticipates 62% growth in bookings this quarter, according to the mid-point of its new guidance range.

What's more, Glu now expects full-year bookings in the range of $502.5 million to $512.5 million, as compared to the original 2020 bookings guidance of $423 million to $433 million. So, it won't be surprising to see Glu Mobile maintain its status as a top growth stock thanks to its terrific business momentum. But is the stock still worth buying considering its red-hot run on the market so far this year?

Person pressing buy button on a keyboard.

Image source: Getty Images.

Glu stock has become expensive, but it may still be worth investing in

Glu Mobile is now trading at a rich valuation thanks to its impressive gains in 2020. Its price-to-sales ratio of 3.10 exceeds the five-year average of 2.15. The stock trades at nearly 150 times trailing earnings.

Clearly, Glu shares have become expensive, and any new investor looking to get on the gravy train will have to pay a pretty penny. But that might be worth it for quite a few reasons.

Users are spending more money on Glu's gaming titles even though the company is dialing down its user acquisition costs. In its latest update, the company said that it carried out a planned reduction of its user acquisition investment in May, and this is positively affecting its bottom-line performance.

Two of its key titles -- Design Home and Covet Fashion -- that accounted for 60% of the total bookings in the first quarter of 2020 are on track to create new records this quarter. Glu's third growth-oriented game, Tap Sports Baseball 2020, which accounted for 15% of bookings last quarter, witnessed a 27% spike in bookings from April 1 through May 25. That is greater than the 21.3% year-over-year growth seen in the first quarter of 2020.

Meanwhile, three other titles -- Diner DASH Adventures, Kim Kardashian: Hollywood, and Disney Sorcerer's Arena -- are performing ahead of expectations as per Glu management.

Glu's better-than-expected performance is not surprising, as gaming demand has increased amid the coronavirus pandemic. According to market research firm NPD Group, sales of video game content in the U.S. shot up 11% year over year to $9.58 billion in the first quarter of 2020. The firm says that growth was seen across all gaming platforms, including mobile, during the quarter.

Glu Mobile has pounced on this trend thanks to recent game launches that have led to a jump in daily average users and bookings per user.

The company's outlook indicates that the trend is expected to continue, and that could translate into increased earnings power and more stock upside.

Bottom-line growth is in the cards

Glu Mobile's margins have been ticking up over the past few years thanks to the company's strategy of making platform-centric games that can generate long-term revenue growth with minimal investments.

GLUU Gross Profit Margin Chart

GLUU Gross Profit Margin data by YCharts

The company ramped up spending on user acquisition, marketing, and other operating expenses in the first quarter of 2020 as it launched new titles. The good part is that it will now reduce those expenses as a percentage of revenue, but the titles will continue to generate solid revenue growth.

Chart showing Glu Mobile's bookings and expenses.

Chart by author, data taken from Glu Mobile's quarterly reports.

Quarter over quarter, Glu's bookings are expected to increase by 55%, while the company's spending on user acquisition and operating expenses will jump at a relatively slower pace of 30%. As such, the uptick in the company's margin profile can be expected to continue in the coming quarters as spending as a percentage of revenue drops.

Finally, potential investors should not forget that Glu Mobile will launch at least two more titles this year, so there could be more upside to its bookings and revenue based on the success of those games. As such, there's a good chance that Glu Mobile may be able to sustain its solid momentum for the remainder, as it has some more moves up its sleeve to take advantage of increasing demand for video games amid the novel coronavirus pandemic.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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