Will Glu Mobile's Rally Be Short-Lived?

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May 17, 2015

Glu Mobile (GLUU, Financial) has been on a terrific run this year, beating analysts’ estimates over the past 2 quarters. Just like last year’s rally, Glu Mobile has appreciated nearly 80% in the last four months. The company’s rally didn’t last in 2014, however it looks like it will continue moving higher this year.

The company’s prospects look bright as its product pipeline is strong. The company has many upcoming games that can drive its margins higher. Glu Mobile reported EPS of $0.02 beating estimates by $0.03 while revenue of $62 million was also above the estimate of $51 million. The good news didn’t end there as Glu Mobile announced Chinese gaming/messaging giant Tencent is investing $126 million in the company through the purchase of 21M shares at $6 apiece. Tencent will own 14.6% of Glu once the deal closes, and Glu will have a $190M cash balance. The company threw light on this strategic deal as Glu’s CEO Niccolo de Masi elaborated on the Q1 investor call:

"I am also very proud to announce today that we have stuck a strategic relationship with arguably Asia's largest Internet company and the world's largest gaming company, Tencent. Tencent has agreed to purchase 21 million shares at $6 per share in a transaction bringing $126 million of gross proceed to Glu. As part of this investment, Steven Ma, SVP of Tencent's Interactive Entertainment Group joins our Board of Directors. Steven Ma runs all of Tencent's online and mobile gaming activities which accounted for over $7 billion of Tencent's total 2014 revenue.

In addition to a highly value added board member, Tencent's minority stake will serve as backdrop for an expected operational partnership with Glu. We anticipate this partnership enhancing Glu success in China and that Glu may potentially publish Tencent games in the west. It also provides Glu with access to Tencent's advanced socio competitive mobile gaming expertise.

Tencent's investment in Glu is at a 22% premium to the one month average share price prior to transaction. I view this as recognition of our operating momentum and unique portfolio approach to grow in our business.

This investment leaves Tencent with an equity stack of 14.6% on a fully diluted basis."

New Games

Glu Mobile recently announced that it will create a free-to-play mobile game under license from Paramount Pictures in coordination with the theatrical release of the new film Mission: Impossible - Rogue Nation. Designed and developed in close creative collaboration with the filmmakers at Skydance Productions, Glu’s game will deliver the action of the Mission: Impossible franchise to mobile audiences worldwide this summer. The company is confident about the prospects of the games, however it also has other titles in its pipeline.

The mobile game maker that hit application store gold with Kim Kardashian a year ago and collaborated with Katy Perry after her status-certifying Super Bowl appearance recently has expedited a comparable manage Britney Spears.

Glu and Spears have gone into a selective five-year understanding for the development of another mobile game. The application will permit players to connect with Spears, recreating the highs and lows of the amusement business. Given the success of Glu’s previous celebrity titles, this will help the company sustain the recent rally.

Conclusion

Glu Mobile rally last year was short lived, however it looks like thing will be different this time. The company has many titles to back up its recent growth and should continue moving higher. The investment from Tencent is another vote of confidence for investors and I think investors should hold onto the stock despite the rally.