Watch this Pair of Mobile Game Stocks Under $4

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The steady rebound in the share price for various game makers will attract investors looking for investments undergoing a sustainable turnaround. Zynga (NASDAQ: ZNGA) and Glu Mobile, Inc. (NASDAQ: GLUU) are two companies that closed recently well above lows reached in November 2012. Zynga is up nearly 70%, while Glu Mobile is up 43%.

GLUU data by YCharts

Prospects Improving for Zynga

Investors underestimated the turnaround potential for Zynga before February 2013 and before quarterly earnings were reported. Zynga beat consensus estimates on a number of metrics. Bookings were $50.2 million higher than expected at $261.3 million and earnings per share were $0.01. For the current quarter, Zynga guided slightly lower than consensus. Bookings are expected to be up to $210 million, below the $240 million consensus. This will translate to a loss of ($0.05) to ($0.04) per share. For 2013, margins are expected to be flat to 10%.

The decline in active users for Zynga products was 4% in Q4 compared to the previous quarter. The 298 million active users still represented a 24% increase over last year. Zynga reduced its operational expenses by two-thirds, by cutting R&D expenses by 70% from the previous year. When a technology company reduces R&D, it could be viewed as a negative, but Zynga is doing this to reduce the number of game titles losing money and concentrating only on successful ones.

Glu Mobile

Like Zynga, Glu Mobile reported quarterly results in February that beat consensus. Glu lost $0.05 per share on revenue of $20.8 million. In the current quarter, Glu expects revenue to be between $17 million and $18.5 million. The view is below a $21.9 million consensus. For 2013, revenue will be below consensus, at $84 million - $92 million. The company will end the year with a loss of -$0.09 to -$0.17 per share.

In the near term, a delay in title launches is expected to hurt results. Expenses grew to $6.3 million in Q4, which represented nearly a third of revenue. Glu held $22.3 million in cash and cash equivalents at the end of 2012.

Glu rallied above $3.50 after the company said it would enter real-money slot game.

Alternate Investment: Activision

Investors who want to gain exposure to mobile game makers would not be interested in established companies like Activision (NASDAQ: ATVI). Activision rallied from $11 to as high as $14.89 recently after reporting a strong quarter. Even though the game giant reported record results and sales for its successful Call of Duty franchise (just to name a few), growing consumer interest in mobile games threatens the growth in console game platforms. A Sony PlayStation (PS4) and Microsoft Xbox 720 release will help the console market as early as this year, but Nintendo’s Wii U release last year undermines this turnaround story. When Nintendo released the Wii U, initial sales were strong, but fell sharply afterwards.

Mobile game development is also less expensive than games made for consoles. As Bloomberg reported, mobile games could be made by teams of 10 or less and at a cost $100. Mobile games typically cost $20,000 to make.

Activision is valued at a forward P/E of 19, so the market is already pricing strong growth for the game maker.

Conclusion

A pullback in game stocks is possible as investors reduce their exposure to the stock market. If this happens, Zynga represents the most compelling investment idea. Sentiment is reversing for Zynga, as real-money gambling is released in June 2013. Zynga is releasing ZyngaPlusPoker and ZyngaPlusCasino. The company also strengthened its board by adding a venture capitalist, John Doerr. Doerr is also a board member at Google. Bearishness in Zynga shares remains high. Nearly 18% of the float was shorted (as at March 15 2013). This means that any surprise upside could result in a bigger rally for Zynga shares.


Chris Lau has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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