Glu Mobile (GLUU) stock has seen volatile swings across 2020's trading. The company's share price is up roughly 22% year to date, buoyed in part by heightened engagement for video games amid coronavirus-related social distancing and shelter-in-place initiatives. However, the stock also trades down more than 30% from its 52-week high following an unexpected loss in the second quarter. It guided for weaker bookings growth in the third quarter, announced a delay for an upcoming game, and hinted at a potential cancellation for another in-development project.
Now, the company is set to publish Q3 results on Thursday, Nov. 5. Here's why I added to my holdings in the company ahead of the earnings release and why I expect that investors who buy the stock at current prices will enjoy strong returns.
Image source: Getty Images.
1. The gaming industry is poised for growth
Keeping long-term industry outlooks in mind is important when picking stocks. Thankfully, the growth outlook for the video game industry is very promising, and Glu Mobile should have plenty of opportunities to benefit from growing demand and new monetization opportunities for interactive entertainment.
Research from GlobalData estimates that annual revenue for the global gaming industry will hit $300 billion in 2025, up from $131 billion in 2018. Mordor Intelligence's most recent projection for the industry came in a bit more conservative by comparison, but it still anticipates that annual gaming revenue will hit roughly $257 billion in 2025.
Investors may find substantial discrepancies depending on the sources and criteria for projection targets, but you'd be hard-pressed to find a substantive analysis of the global gaming industry's progression that doesn't guide for impressive growth in the coming years. The trends bode well for Glu Mobile.
2. Glu Mobile is attractively valued compared to industry competitors
Glu Mobile has a market capitalization of roughly $1.3 billion, making it the last publicly traded Western game publisher that's still in small-cap territory. That could wind up working to the advantage of investors, as even relatively small successes will be capable of moving the needle in a bigger way.
With a forward price-to-earnings (P/E) ratio of roughly 21, Glu Mobile has a lower forward P/E than major gaming competitors, including Take-Two Interactive, Activision Blizzard, Electronic Arts, and Zynga. The difference between Glu's forward price-to-sales ratio and those of its main competitors is even more pronounced.
GLUU PS Ratio (Forward) data by YCharts
Glu's enterprise-value-to-forward-sales ratio also comes in below industry competitors by similar levels, and the company's forward price-to-earnings growth (PEG) ratio of just 0.05 also points to shares being undervalued. That very low forward PEG ratio largely stems from the fact that the publisher's earnings have been relatively low, so posting big growth is easier. However, the overall picture painted by Glu Mobile's valuation metrics and fundamentals suggests explosive growth potential if the company can continue to drive engagement for its core titles and launch new hit properties.
3. A strong balance sheet paves the way for acquisitions
Glu Mobile ended its June quarter with roughly $283 million in cash against zero debt, and management has indicated that some of these assets would go toward acquiring new game development studios. The company has a good track record on the acquisitions front, with its most notable success being its purchase of CrowdStar through equity purchases in 2016 and 2017 valuing the developer at about $50 million. CrowdStar titles, including Design Home and Covet Fashion, have delivered very strong performance for Glu, and more shrewd acquisitions moves could help send Glu Mobile stock much higher.
4. Core titles are still putting up solid performance
Longevity for core franchises, including Covet Fashion, Design Home, TAP Sports Baseball, and Kim Kardashian: Hollywood, helped Glu Mobile's bookings grow 79% in the second quarter, reaching $182 million. The addition of Disney Sorcerer's Arena, which launched in March, also helped boost sales -- although it's not clear if the title will settle into being a long-term performance driver.
Guidance for bookings growth of roughly 10% in the third quarter looks much less exciting by comparison and likely played a role in the sell-offs that followed the company's second-quarter report. However, part of the growth deceleration stems from pulling back on marketing to attract new players and focusing on profitability for some titles, including Disney Sorcerer's Arena.
While projected third-quarter bookings growth looks unimpressive compared to Q2's performance, Glu Mobile is still guiding for full-year bookings growth of roughly 28%. That suggests the company's core catalog is still pretty healthy.
Image source: Getty Images.
5. New games and an innovative growth project
Glu Mobile management announced in its Q2 conference call that its upcoming game Deer Hunter World would no longer release this year and had been pushed to 2021. The company also announced that it was shifting development resources away from its interactive story game Originals following uninspiring audience numbers in beta testing, and comments from the team indicated the game might not see release.
Despite the delay for Deer Hunter World and potential cancellation for Originals, Glu's collection of development studios and upcoming product pipeline remain promising. In the sports game category, Glu Mobile is also on track to launch a new fishing game next year, and extra development time taken to improve Deer Hunter World's online multiplayer could significantly improve the game's performance and longevity.
Even more exciting: CrowdStar has an in-development title that's due to launch next year. The studio is responsible for Glu's biggest moneymakers, Design Home and Covet Fashion. Based on performance for the development studio's previous titles and comments from management about the upcoming game's beta-test engagement numbers, there are reasons to think that the studio's next game could be a major performance driver.
Glu announced and launched a real-world e-commerce store integrated into Design Home at the end of September, allowing users to purchase furniture and other home decor products. The idea here is that players can purchase items that they use to decorate their in-game virtual homes for their real-world abodes as well.
The ability to turn its games into connected e-commerce platforms has the potential to be a big growth driver. There's a good chance that Glu will also pursue this approach with Covet Fashion if the test with Design Home yields encouraging performance.
Image source: Glu Mobile.
Whether this is the right idea at the right time or whether Glu is the company to pull it off remains to be seen. However, there's a good chance that some company will be able to utilize the high engagement levels for popular video games and connect that to a real-world e-commerce platform at some point. Design Home and Covet Fashion are uniquely well-positioned to test opportunities to bridge video games with retail platforms for real-world goods. It's not a stretch to think that games that focus on players acquiring different home decor or clothing items could be used to sell real-world goods.
Glu Mobile presents an appealing package
With its reasonable valuation, a dependable collection of gaming franchises, a strong balance sheet, and development studios that could cook up new hits, Glu Mobile looks like a great buy. Experiments turning games into online retail portals present another potential growth avenue that could lead to explosive growth. Glu is far from being the most resource-rich competitor in its industry, but the company looks poised to deliver wins that send its stock price substantially higher -- and it has huge potential for expansion over the long term.
