Grab This Mobile Gaming Stock While it’s Still a Bargain

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

I always knew that Mr. Market might sometimes act in an irrational manner. What I didn’t know was that the market can also act irrationally out of pure ignorance. Shares of mobile games maker Glu Mobile (NASDAQ: GLUU) have lost almost 28% of their value this month and I simply fail to understand why.

Glu Asks: Why Me?

Glu hasn’t done any wrong this month. In fact, the company announced that it has penned a partnership with U.K.’s Probability for applying its intellectual property for real-money mobile gaming. The way I see it, this move will open access to a growing mobile gambling market without any regulatory troubles since Probability will accept all regulatory responsibilities. In addition, Glu reiterated its third-quarter guidance to tell us that all’s well at the company.

Zyngafied!

One big reason seems to be the faltering fortunes of social gaming company Zynga (NASDAQ: ZNGA). Zynga has been running into one trouble after another ever since it went public and slashed its third-quarter and full-year guidance a few days back. While it’s perfectly fine for investors to punish Zynga for its failings, it isn’t correct to punish Glu as well since both companies have completely different business models.

But Wait, Glu’s Better than Zynga

While Zynga, the social gaming butterfly, is dependent on Facebook for its bread and butter, Glu Mobile makes games for mobile phones running the most well-known operating systems of our day. Glu’s games have featured among the top grossers on Google’s Play Store and Apple’s (NASDAQ: AAPL) iOS store and the company’s top line has grown at a steady pace over the last one year, as opposed to Zynga’s.

Take a look at the quarterly year-over-year revenue growth charts for both the companies and spot the difference.

<img src="http://media.ycharts.com/charts/484decdc0f12f303f879fa36c557f5bd.png" />

GLUU Revenue Quarterly YoY Growth data by YCharts

And similarly, the year-to-date stock price charts of both the companies differ wildly.

<img src="http://media.ycharts.com/charts/bb2b35c126389e00cd23d4ce77c0093c.png" />

GLUU data by YCharts

Glu’s stock appreciated at a nice pace but has now been thrown off gear, partly in thanks to Zynga’s faltering fortunes. Even then, the mobile game maker stands head and shoulders ahead of Zynga as far as stock price performance is concerned.

While Zynga has failed to live up to its initial hype, Glu has been riding the smartphone and tablet revolution smartly. Glu has been growing its business through a smart mix of acquisitions, partnerships and most importantly, addictive games.

Glu has been Playing a Good Game

The company is an expert at purchasing game studios and integrating them into its business seamlessly, like it did with Blammo Games and Griptonite last year and both of them were profitable in the last reported quarter. Moreover, Glu had acquired IGN Entertainment’s GameSpy last quarter for delivering an enhanced multiplayer and cross-platform gaming experience.

In addition, the company’s games have been quite successful and it has been putting a lot into R&D for making its games better. Most of Glu’s games were timed for release after the launch of the iPhone 5, as iOS devices are expected to contribute around two-thirds to Glu’s top line this year. Apple sold a stupendous 5 million iPhones over the first weekend and expectations are quite high as we enter the holiday period. Hence, as more iPhones fly off the shelves, Glu’s top line would stand to gain immensely from the latest iteration of the iPhone.

In addition, Glu is also profiting from iPad sales and I expect the company to derive more revenue when the iPad Mini materializes. A smaller iPad would be handier as far as playing games is concerned and so, Glu will most probably reap the benefits. Historically, Glu’s games such as Small Street, Blood and Glory and Deer Hunter Reloaded have been the top-grossing games on the iOS store and I won’t be surprised if its forthcoming releases such as Contract Killer 2 and Death Dome perform well.

The Takeaway

While all has been going well in the house of Glu, Mr. Market seems to have a different opinion of the company, for reasons unknown. Glu is a flag bearer in mobile gaming. It has a solid presence across Android, iOS and Windows Phones platforms and is continuously looking to improve its offerings through partnerships and new games. An unchanged guidance suggests that Glu’s operations are going smoothly and so, the stock’s predicament is uncalled for.

Thus, with no negatives to write about, I believe investors should capitalize on this opportunity and get some more of Glu Mobile for their portfolio at these beaten down levels.

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