Any Hope Left for Investors in Mobile and Social Gaming?

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

While the public markets provide limited focused investment options in the hot mobile and social gaming sector, the stocks of Glu Mobile (NASDAQ: GLUU) and Zynga (NASDAQ: ZNGA) continue to struggle as the firms have lacked the ability to produce consistent game winners especially on mobile. Currently small, private companies have produced most of the huge mobile gaming franchises such as Angry Birds, Minecraft, and Temple Run.

Does recent failures by the public companies preclude any ability for future success? Should investors look towards the larger cap console game publishers that are transitioning into the mobile and social gaming platforms?

Glu Mobile

The company is a leading global developer and producer of freemium games for smartphone and tablet devices. Glu is focused on creating compelling original IP games such as Blood & Glory, Deer Hunter, Frontline Commando, and Gun Bros on a wide range of platforms including iOS and Android.

The company reported 78% smartphone revenue growth for 2012 though the numbers substantially slowed down to only 3.5% in Q4 to $20.8M. Glu reported a small operating loss and negative adjusted EBITDA showing how the huge growth for the year hasn’t turned into profits as of yet.

The forecast for 2013 is for a slight increase in smartphone revenue combined with a decline in legacy featurephone revenue making expectations for flat overall revenue growth. With a market cap of around $145M, the stock trades at a reasonably low valuation if the company can turn around the monetization of existing franchises or create a substantial winning franchise.

Zynga

The company is a leading provider of social game services, which include Zynga Poker, Words With Friends, and FarmVille. Zynga had approximately 298M monthly active users playing it’s games on global platforms, including Facebook, Zynga.com, Apple iOS, and Google Android.

The company reported 2012 revenue of $1.3B, up 12% over 2011. The bookings of $1.15B were down 1% suggesting weaker results moving forward. More importantly the Q4 bookings were down substantially from 2011 levels and earnings dropped from the previous year levels.

As with Glu, the stock is down significantly from the highs of 2012. The stock currently trades with a market cap of around $2.2B as the company struggles with a user base that has transitioned from games dominant on the Facebook platform towards mobile-only gamers.

Mid cap player

Another option for investors is to invest in the mid cap player Electronic Arts (NASDAQ: EA). The company already has a market cap of over $5B with a revenue base of nearly $4B from being a dominant game published on consoles.

The company is making a quick shift towards digital revenue by becoming the #1 publisher on the iOS platform during 2012. Digital revenue grew 37% to $1.5B for the year while the publishing packaged goods revenue base declined.

Zynga is quickly shifting towards the mobile and social realms though a substantial portion of the business will remain on console platforms such as the Xbox or PlayStation. By that nature, the company is more of a proxy for the complete global gaming market instead of only the shift towards the digital platforms.

Conclusion

The recent forecasts for 2013 by Glu Mobile and Zynga continue to leave investors with limited hope that these companies will be able to turn around franchises that have lost momentum. The recent highly successful games continue to come from private companies such as Zynga when it was private or the recent success of the private developer of Minecraft named Mojang or Imangi Studios that created the successful Temple Run franchise.

The recent results suggest that the predictability of mobile and social games could be very random. Currently throwing assets and developers at games apparently doesn’t increase success rates. Especially considering a single developer in Europe created the wildly successful Minecraft franchise that last year generated over $232M in revenue.

While the potential exists for huge rewards in this sector, it doesn’t appear that past winners can guarantee future success.


Mark Holder and Stone Fox Capital Advisors, LLC have a position in Glu Mobile. The Motley Fool has no position in any of the stocks mentioned. 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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