Glu Mobile Signs Important Deal With Potential Cash Infusion

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

In order to be successful in the tech sector, it tends to help to have the financial flexibility in order to invest for the future. For anybody interested in investing in the mobile gaming sector, the main two options have been Glu Mobile (NASDAQ: GLUU) with a mobile only focus or Zynga (NASDAQ: ZNGA) with a shift towards mobile from Facebook. The major difference has always been that Glu only has $20 million in cash while Zynga had a net cash balance of over $1 billion. Of course vast differences exist between those two stocks especially when it comes to size, but each offers a similar valuation multiple and the ability to make investors lots of money if either can score a few big mobile winners.

Glu Mobile is a leading global developer and publisher of freemium games for smartphone and tablet devices focused on creating original IP games such Contract Killer, Deer Hunter, and Gun Bros.

Glu Mobile has several new promising technologies including a real-money gaming portfolio and a platform to launch games-as-a-service (GaaS) to further monetize and improve retention traction of already popular games. The question remains whether the business is predictable enough to generate strong returns or whether small, private firms will always generate outlandish returns based on surprise hits such as Angry Birds and Miner Craft. More importantly, it announced a deal with MGM Interactive where that company will potentially invest much needed cash in Glu via warrants.

MGM Interactive deal

First and for most, the MGM deal could provide a much needed cash infusion though that depends entirely on the warrants vesting and being exercisable. The details are as follows:

  • The companies entered into a warrant agreement initially exercisable to purchase up to 3,333,333 shares at an initial exercise price of $3.00 per share.
  • 333,333 shares vested and became exercisable on July 15, 2013.
  • 333,333 shares will vest and become exercisable on each date Glu commercially releases a new mobile game based on a MGM property.
  • The company is already working on a mobile ROBOCOP game.
  • 1,000,000 shares will vest and become exercisable on the date Glu commercially releases a new mobile game based on JAMES BOND.
  • In total, the fully exercised warrants would generate $10 million in proceeds.

Too bad the cash isn’t received up front, but the good news is that Glu has access to develop mobile games based on the popular JAMES BOND franchise and less importantly ROBOCOP. It even sounds as if the ROBOCOP game may be released in the next few quarters considering it is already being developed.

Will disappointing results continue?

As mentioned in previous articles about both Glu Mobile and Zynga has been the propensity of late to produce disappointing results. As small startups have been wildly successful with mega hits, the larger public firms have struggled to create these massive hits.

Glu Mobile never seems to live up to the high expectations it creates. For Q2, analysts now expect the company to see a nearly 30% decline in revenues to only $17.2 million. The number is down from over $24 million last year and most investors had to have expected a surge to at least $30 million this year.

At least that is better than the 39% drop in revenue expected by Zynga. Until these numbers start increasing, the stocks will likely trade around the bottom with the one caveat being the encouraging developments.

Encouraging developments

Glu recently delivered on a promise of becoming a publisher of third party games. The release last week of Black Gate: Inferno became the first game to be released by Glu’s publishing organization. The fully online 3D MMORPG game is already an established top-grossing game in the Chinese market and will be initially launched in the U.S., Canada, and Australia.

The likely biggest news from the Q2 earnings report will be any developments from the plans to work with Skillz to introduce skill-based, real-money gaming in Glu’s skill-based games. The Skillz tournament platform will allow users to compete for cash prizes in games such as Deer Hunter Reloaded in up to 37 U.S. states as of the end of Q213. The popularity of that game and the ability to win cash prizes could combine to provide a major hit.

Fierce competition

Besides the small, private firms that continue to deliver the massive winners in mobile games, Electronic Arts (NASDAQ: EA) remains the biggest threat as the top global publisher on the iOS platform. The company now tops over $100 million in quarterly mobile revenue and has a cash hoard to match that of Zynga. EA faces major headwinds with declining console sales and the shift to mobile that only accounts for roughly 10% of the current revenue base. Though the company is very profitable giving it an advantage over both Glu and Zynga that struggle to produce profits.

Bottom line

While Glu obtained access to several game franchises via the MGM Interactive deal, it still lacks the cash needed to ensure success. Any cash infusion from MGM could be years away though the good sign is that it accepted the warrants at a price over 10% higher than the current stock price.

If online gambling or skill-based gaming becomes a major revenue gainer, both Glu and Zynga are positioned for significant gains. Suddenly mobile gaming could be more significant than either Facebook or consoles and these two stocks are positioned to benefit the most of any public stocks.

Mark Holder and Stone Fox Capital Advisors, LLC own no shares of any stocks mentioned. 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!

blog comments powered by Disqus