Glu Mobile (NASDAQ:GLUU) is rallying from its 2019 lows. The stock saw a 26% spike on Feb. 6 following an earnings and revenue beat for the fourth quarter of 2019. Though it has given back some of those gains, it continues to recover from last year’s slump.
Shares will fluctuate in the short term. However, with the company on a clear path to profitability and the upcoming release of what should become a major new franchise, Glu Mobile is delivering the earnings and gaming growth that should ensure the stock’s future.
Still attractive after the post-earnings surge
The company behind franchises such as Design Home, Covet Fashion, and Tap Sports Baseball reported operating income of $10.9 million during the fourth quarter. For full-year 2019, Glu managed to log positive operating income in three out of four quarters, putting it solidly in the black for the year and giving investors hope of consistent profitability.
Admittedly, investors will pay a bit of a premium buying into the stock right now. Glu Mobile trades at 28 times forward earnings estimates as of this writing, while analysts predict earnings will grow about 15% annually over the next five years.
However, investors still have reasons to buy, at least for the long term. Glu Mobile has the backing of China’s Tencent (OTC:TCEHY), which owns a 14.5% stake in the gaming company. This gives Glu a springboard into China, which has battled the U.S. for the title of world’s largest gaming market.
A future that hinges on mobile gaming’s growing popularity
The video game industry is crowded with smaller rivals like Zynga and also increased competition in the mobile space from industry leaders such as Activision Blizzard, Electronic Arts, and Take-Two Interactive. Even Apple has thrown its hat in the ring with the launch of Apple Arcade.
The market is a large one , though, with gaming revenue expected to rise to $196 billion by 2022. Tablet and smartphone games remain the largest segment with 45% of the market in 2019 — that figure should approach 50% in just a few years’ time, according to research firm Newzoo. That industry-wide trend should help not only Glu Mobile but also other tech stocks in this niche.
In 2020, investors should closely watch the key partnership between Glu and Walt Disney. This alliance has the potential to not only boost bookings and earnings at the company but also lift the entire Glu Mobile brand. Glu will launch Disney Sorcerer’s Arena some time during the first quarter. Management has pointed to this title as one of its most important upcoming releases, and it comes on the heels of elevated consumer interest in Disney following the launch of the Disney+ streaming video service.
The alliance with Disney should also help expand the new game’s global appeal. CFO Eric Ludwig noted during a conference in December:
As I look out on the release slate for 2020, I do think we’ll see some geography expansion in EMEA [Europe, Middle East, and Africa] largely, maybe a bit in LatAm [Latin America], but more on EMEA. To really attack the Asian markets — Japan, China, Korea — that’s a much harder market to crack, and you’ve got to have a title that is really relevant for those user bases.
It’s possible that our Disney strategy RPG title [Sorcerer’s Arena] could possibly be relevant for that. And as we launch that in the western market, if it’s starting to show the signs of life that it could work well in Asia, most likely, we would partner with our investee company, Tencent, who owns 15% of Glu, and just see about how they could help us take it to Japan, China, and Korea.
This focus on overseas markets will be important for investors to follow as Glu Mobile still derives 87% of its revenue from the U.S.
The recent earnings beat shows that the company has reached a point where profitability is now the norm. This should alleviate one longtime concern investors had regarding the company. Moreover, the massive growth of the gaming industry and critical alliances with the likes of Tencent and Disney should serve as a tailwind for Glu’s results in 2020 and beyond.