Glu Mobile (GLUU) has enjoyed a nice run lately, with its stock up more than 88% in the past year. However, now it seems many investors are betting against the mobile game maker. To be sure, more than 31 million Glu Mobile shares are currently sold short, or more than 33% of the stock's outstanding shares. For comparison, Glu Mobile's closest rival, Electronic Arts (EA 0.46%), has a short interest of just 3%.
If you are unclear on how short-selling works, let me explain. Short-sellers make money by betting against stocks. They borrow shares from a broker, then immediately sell those shares on the open market, only to buy them back later at a (hopefully) lower price. Ideally, the short-seller profits from the difference. However, if that stock goes up, short-sellers must cover their positions by buying back the stock at a higher price, incurring a loss in the process. This is why short-selling is risky business. Nonetheless, let's take a closer look at Glu Mobile and whether it makes a good short sell today.
Short story
One of the main reasons investors place short bets is because a given stock is overvalued or expensive from a valuation standpoint. Yet, this isn't the case with Glu Mobile. In fact, its stock looks fairly valued today with a price-to-sales ratio of 2.79, which is in line with the software industry's PS ratio of 2.82. The mobile game maker also boasts a healthy balance sheet, with zero long-term debt. Glu Mobile could be poised for a pop if the high short interest in this name triggers a short squeeze. A short squeeze occurs when many short-sellers rush to cover their positions in a stock at the same time, thereby driving up the stock's price in a short period.
Therefore, Glu Mobile's high short interest could actually benefit long-term shareholders if the company gives investors a reason to push its stock higher. The company's popular Kim Kardashian: Hollywood game could be that reason. Both this game and Glu Mobile's Dino Hunter: Deadly Shores franchise have broken company records in terms of revenue, downloads, and daily active users. The company's chief executive, Niccolo de Masi, said, "Our second-quarter results were boosted by the continued strength of Deer Hunter 2014 and Eternity Warriors 3 in addition to the exceptional early performance of Kim Kardashian: Hollywood."
Source: Glu Mobile.
Nevertheless, recent data from research firm App Annie suggests that the game's iPhone downloads have declined in the past month. However, its recent Facebook launch should help offset those declines. Glu Mobile released its Kardashian game on Facebook this month and added new content to it that lets players plan their dream wedding in Florence, Italy. Ultimately, this should dramatically expand the game's addressable market, because a whopping 375 million play Facebook connected games every month. If its Kardashian franchise is a success on Facebook, it could be a significant revenue driver for Glu Mobile in the quarters ahead. Moreover, this isn't Glu Mobile's only smash hit game. Its Dino Hunter title achieved a single-day download record, while the company's recent acquisition of Cie Games gives it the current No. 1 grossing racing game on the App Store and Google Play, according to Glu Mobile.
These catalysts make shorting the stock here risky business. Not to mention, the gaming stock looks reasonably priced, with shares trading more than 40% below the stock's 52-week high, at around $4.50 a share today. With Glu Mobile set to report third-quarter results at the end of the month, investors may be better served on the sidelines until management gives us more color on how its top games are performing.
