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Zynga And Glu Mobile Are Terrific Buy On The Dip

April 27, 2014 | About:

Both Zynga (NASDAQ:ZNGA) and Glu Mobile (GLUU) have been beaten down during the wide market sell-off. The companies have performed very nicely in the recent quarters and the recent dip was unwarranted. The plunge has made both these companies an attractive investment option and now would be the right time for opportunistic investors to buy these two stocks. Let’s take a look at the companies’ prospects.

Impressive Performance

On non-GAAP basis, Zynga's annual bookings fell down from $1.1 billion to $716.2 million; however it surpassed the consensus estimate of $712 million. On the earnings front, Zynga shared adjusted EBIDTA of $46.5 million, while non-GAAP net loss came in at $34 million.

Moving on to Glu Mobile, this quarter was sensational for the company. The company declared record non-GAAP revenues of $42.8 million, up 62% year-over-year, while adjusted EBITDA came in at $6 million. The company managed to exceed guidance range on both fronts and expects 2014 to be profitable.

The latest reported quarter was fruitful for both the companies and the impressive performance has boosted the shares. Nevertheless, I still believe both these companies have huge upside potential and investors looking to benefit from mobile gaming should hop on board as soon as possible. Let's take a look at their future prospects one by one.

Zynga’s strong prospects

The future looks bright for Zynga. The company recently completed the acquisition of NaturalMotion, a mobile gaming company responsible for hits like CSR Racing and Clumsy Ninja, and it is good news for investors for multiple reasons. Though Zynga's last high-profile acquisition of OMGPOP ended in a disaster, I don't think history will repeat itself solely because of the fact that I believe Don Mattrick is a better CEO than Mark Pincus. Ever since Mattrick took over from Pincus, Zynga's fortunes have turned around. So far, Mattrick has not put a foot wrong and has implemented his ideas flawlessly, thus I expect the acquisition of NaturalMotion to be a game changer for Zynga. Zynga paid around $527 million for NaturalMotion, including $391 million in cash and 39.8 million Zynga shares at its $3.42 close price on January 29.

From the time when Mattrick took control, he has been working migrate Zynga towards mobile gaming and this acquisition has served that purpose. With this deal, Zynga will get a strong portfolio of current and upcoming games, animation middleware --Euphoria-- that has led to licensing deals with motion picture studios and other gaming vendors like Take-Two, and a character with real franchise potential in Clumsy Ninja. Moreover, in addition to gains in mobile gaming portfolio, Zynga also expects this deal to add $70 million-$80 million to non-GAAP earnings this year.

In addition, Zynga is also working on reducing losses. Mattrick's aggressive cost-cutting initiatives allowed Zynga to beat the consensus estimate in Q3 FY2013 and it looks like the company has stuck to this plan as it declared that it will shed nearly 15% of its workforce. This proposal should further diminish Zynga's overheads and help it to perform even better in the upcoming quarter.

Glu Mobile Targeting China

As per Alibaba, the mobile gaming market in China jumped 275% y-o-y in 2013 to $1.9 billion. Thus, Apple's (AAPL) tie-up with China Mobile comes in as a big boost to Glu Mobile. The deal gives Apple access to more than 700 million China Mobile customers, and analysts are estimating that Apple could perhaps sell an additional 20 million iPhones in China in 2014. Moreover, Creative Strategies analyst Ben Bajarin noted, "There's pretty big pent-up demand on China Mobile for the iPhone. The deal, while huge for Apple, is underestimated by most analysts. It could very well ramp faster than any of us can imagine."

In Q3 FY2013, Apple's app store accounted for nearly 64% of Glu Mobile's revenue, therefore this much-awaited deal will undoubtedly benefit Glu Mobile. On an average, Glu has been developing 13 games every year since 2013, but it has stepped up its efforts and could launch well over 30 games this year to make the most of the Chinese gaming market. Moreover, Glu Mobile disappointed investors when it delayed the launch of Frontline Commando 2 and Motocross Meltdown. However, this decision looks like a sensible one now as the two games will be launched after iPhone sales begin in China, thus giving it exposure to a wider range of customers.

Strong Pipeline

Deer Hunter 2014 and Eternity Warriors 3 helped Glu Mobile to surpass all expectations in a big way and the company will be making regular content updates to sustain the popularity of these franchises. Apart from the expected launch of Frontline Commando 2 and Motocross Meltdown, Glu Mobile will also be launching the next installments of the Contract Killer and Frontline Commando franchises. The company is confident the next installments have the potential to be the strongest performers in the respective series yet.

Wrapping Up

Both Zynga and Glu Mobile have a lot of room to grow. However, investors shouldn't delay buying these companies as the stocks will continue to rise gradually after they declare their earnings in the coming days. Though Glu Mobile looks a better buy, Zynga is not a bad bet either. Both these companies have strong prospects and will continue to grow in 2014, which is why you should consider adding them to your portfolio.

Rating: 5.0/5 (1 vote)



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