Glu Mobile (Nasdaq: GLUU) shareholders were in for a treat this morning. Shares jumped in late trading on reports that losses would be slightly less painful than expected. Non-GAAP revenue came in a hair over $20 million, a fairly substantial gap from GAAP revenue, which clocked in at $15.2 million. Is the company any closer to profitability? That depends on which metric you look at, but shareholders don't seem to mind for the time being. Perhaps they should.
Keeping it real
Glu's financial performance over the last few years has been nothing to write home about, but its stock price sure has been. Take a look at the disconnect that's emerged between the revenue and the reality:
Glu Mobile Stock Chart by YCharts
It's not just revenue that's flatlined. Profits have been elusive as well:
Sources: Morningstar and Glu Mobile earnings release.
Of course, the longer trend in Glu's stock price has been profoundly disappointing, but that hasn't stopped post-crash investors from reaping big profits. What are investors expecting? It seems apparent that they're waiting for the juicy profit margins often earned by major software companies. I'm not so sure those are on the way.
Facts and figures
Long-term earnings trends don't justify the stock's rise at this point. The company's market cap, just north of $250 million, would merit a 16 P/E… if every cent of its revenue became profit. That clearly won't happen unless the company catches lightning in a bottle.
There's always the chance that Glu could turn into the next Rovio, which turned the launching of birds into pigs into a billion-dollar marketing empire. With 53 games available, Glu has plenty of product breadth, including tie-ins to popular entertainment franchises like Family Guy and Activision Blizzard's (Nasdaq: ATVI) Call of Duty. But the apparent failure of multiple top-tier brand names to bring in new money makes such a strategy look unrewarding.
Building more original games helped non-GAAP gross margins grow from 73% to 87%. Based on the cheerful trajectories laid out in Glu's presentation, the company's on a rocket ride to profitability. Maybe. Despite major growth in monthly active users and daily active users, Glu's freemium model doesn't seem to be paying off. Both numbers nearly tripled from the year-ago quarter, but only about 1% of users pay, and they haven't yet affected the bottom line in a big way. Social-gaming giant Zynga (Nasdaq: ZNGA) has been compared to Glu, often unflatteringly -- it's hard to maintain user interest in a crowded field to which entry barriers are quite low.
Over the past two years, the company's growing smartphone revenue has essentially replaced plummeting feature phone revenue. In the first quarter of 2010, Glu earned $2.1 million and $17.5 million in smartphone and feature phone revenue, respectively. In the most recent quarter, that's shifted to $15.0 million and $5.1 million. Glu might reach profitability in time, but it'll have to do more than replace revenue streams to justify its valuation now.
Final thoughts
A few superstar games can far outclass a huge stable of also-rans, as Activision and Electronic Arts (Nasdaq: EA) continue to prove. EA's Sims Social assaulted Zynga's growing library of drearily similar Facebook-based titles, and Activision's relatively small roster of top-tier titles continues to throw off cash. Just because the mobile space is growing rapidly doesn't mean that every company will boom along with it.
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