On Tuesday, Electronic Arts (Nasdaq: ERTS) announced a plan to acquire social and mobile gaming shop PopCap Games, sparking an immediate rise in the stock price at … another company entirely.
The beneficiary of EA's news: mobile game-house Glu Mobile (Nasdaq: GLUU). Since the EA deal was announced, Glu shares have wafted nearly 12% higher. The real question, though, is whether Glu is worth the $318 million valuation its shares now command.
Bull thesis
Bulls will argue that $318 million is a small price to pay for a stick of Glu. After all, EA itself sells for more than $7.8 billion, and profitable Activision Blizzard (Nasdaq: ATVI) costs nearly twice that -- but both of these names are still focused on making games for wired consoles, when clearly "mobile" is the future. Witness the $20 billion market cap that pundits are imputing to Zynga these days.
Bear thesis
Fine and dandy, reply the bears. But here's the thing: Zynga is a profitable business today, and for that matter, so is PopCap. In fact, it's been profitable ever since it went into business 10 years ago. PopCap Games booked $100 million in revenue last year and is on pace to grow that figure 40% this year. In contrast, Glu saw its revenues decline 18% in 2010, and it's set for another decline in 2011. The company's been unprofitable for the past 12 months yet trades at an eye-popping 583 times the tiny profit it might earn next year.
Yes, there's a chance EA will come in and save Glu investors from their misery. After all, EA spent $400 million to buy Playfish two years ago and picked up Angry Birds publisher Chillingo for $20 million just last year. I think that with this latest PopCap purchase, it's safe to say there's a trend afoot. Glu could be the next name on EA's shopping list.
Foolish takeaway
EA may be silly enough to spend hundreds of millions to acquire a money-losing business -- but that doesn't mean you should do likewise. Betting on a buyout is the investing equivalent of relying on the kindness of strangers. Sure, maybe someone will come along and offer you more for your shares than you paid for them -- but maybe not. And if no one does take those shares off your hands, you're the one stuck owning a money-losing enterprise.
I don't want to take that risk. Do you? If so, then go ahead and add Glu Mobile to your Fool Watchlist. As soon as that "greater fool" wanders in, ready to hand you some cash, we'll let you know.
