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C.H.A.O.S. Puts GLUU Through the Wringer

Only seven companies in the history of my C.H.A.O.S. Strategy have scored a perfect 100.

When that happens, it’s a signal to immediately get invested.

Why? Because a score of 100 means that new technology is about to shift the world on its axis.

The technology is so profound that the lives of every man, woman and child will never be the same.

Along the way, early investors will get richer than you can possibly imagine.

For the entire list of perfect 100s, please view my full C.H.A.O.S. report.

Today, I’m putting mobile application maker, Glu Mobile (GLUU), to the test.

You’ll recall that companies with scores of 85 or better on the C.H.A.O.S. Meter represent a screaming “Buy.”

~Cash

In order for you to make money worthy of a king, the first thing I do is ask if a company is doing the same…

In Glu’s case, the answer is a resounding “yes!”

For starters, Glu’s quarterly earnings have consistently beat the snot out of Wall Street estimates.

Granted, annually speaking, Glu has yet to post positive earnings – an important metric to note.

As for revenue, Glu reported the strongest financial performance of its history in Q4 2013 – channeling $42.8 million in revenue. That was a massive 62% year-over-year jump.

Speaking of revenue, sales have either soared or held steady since 2010.

Better yet, the company recently raised its 2014 year-over-year revenue guidance to $150 million on the high side, representing another record-breaking number.

It’s not all rosy, though.

As I mentioned, Glu hasn’t posted positive earnings once. Plus, its numbers are all over the map, failing to show any consistency in its growth. And these inconsistencies are the driving factors behind its volatile share price.

Plus, with the millions of apps that exist across every mobile and online ecosystem, it literally feels like we’re living in a digital dumpster. As a result, companies like Glu are forced to spend cash to stand out in the crowd.

And with no signs of a slowdown in mobile growth, the cost to acquire new customers isn’t going down anytime soon.

Either way, the company has shown the ability to generate huge amounts of money in an overly crowded market.

C.H.A.O.S. Meter: 17/20

~High Impact

Glu’s go-to-market strategy garners a ton of social attention from gaming enthusiasts.

So its level of impact can be rather high on a “viral conversation” level.

However, the company’s technology isn’t revolutionizing an entire market or shifting major industries.

And with uninspiring games like Motocross Meltdown in the pipeline, it clearly won’t be anytime soon.

The entertainment component of Glu’s technology gives it some high-impact potential. But Glu isn’t re-writing the mobile-gaming market, so it falls pretty flat here.

C.H.A.O.S. Meter: 10/20

~Acceleration

One of the main reasons I’m running Glu through my C.H.A.O.S. System has to do with its increasing coverage.

When I started watching this stock, it was fully under Wall Street’s radar.

Today, 13 analysts are covering Glu. Nine of them rate it a “Buy,” with an average target price of $4.85. That represents about a 21% jump from today’s price. And when you consider Glu’s successful product launches, industry-wide popularity and tiny market capitalization – it’s easy to understand why.

Glu has also been on the radar of companies – like Electronic Arts (EA), Activision Blizzard (ATVI) and Microsoft (MSFT) – as an attractive candidate for a buyout.

There are also rumors that companies like Tencent Holdings (TCTZF) and Alibaba are considering making Glu an offer.

Indeed, the great thing about a company like Glu is, there’s always a rumor floating around! And each time a new one circulates, the stock responds accordingly…

It’s important to note, however, that a buyout for Glu (at least right now) would actually stunt the company’s growth. That’s because it needs more time to develop under its new management in order to realize its full potential.

At that point, it would yield a higher premium if it were to eventually sell – a win for both the company and its investors.

C.H.A.O.S. Meter: 16/20

~Orders

Being a mobile-gaming developer, Glu’s orders work a little bit differently than those of Neonode (NEON), Splunk (SPLK) and Plug Power (PLUG) (companies I’ve already run through the C.H.A.O.S. System).

Here’s how…

Say you come across one of Glu’s many games in the app store, and decide to give it a shot. Glu won’t actually charge you to download and play.

Once you start playing, however, Glu will hit you with a number of “in-app purchase” options that offer additional content for a richer gaming experience.

This is known as a “freemium” business model, a technique that’s becoming increasingly popular with mobile developers in every category (think Spotify and Dropbox).

It’s how they “get their claws in you,” so to speak.

But the sustainability of this business model does raise some concerns…

Consider, in its latest Mobile Games Monetization Report, San Francisco-based research firm, Swrve, reported that 50% of revenue for freemium companies comes from only 10% of their users.

Worse still, in order for Glu to become profitable, it’ll need to capture even larger sums of money than the record-breaking figures it’s currently producing. So each quarter, Glu will have to pull in over $42 million. And since 60% of every game’s revenue comes in the first two weeks after each launch, it’s going to need to keep pumping out new game titles at a breakneck pace. Needless to say, that’s also not very sustainable.

And as I mentioned before, the app market is becoming overwhelmingly saturated, which only makes the freemium business model even tougher on Glu’s business.

C.H.A.O.S. Meter: 14/20

~Scalability

In order for Glu to scale up its business, it needs to pull in more deals like the one it struck with MGM Resorts International (MGM).

The deal gave Glu the rights to develop a game around MGM’s intellectual property. More specifically, the movie RoboCop.

Glu received $10 million – along with all profits from the game – in exchange for giving MGM the equivalent value in shares.

More contracts with major movie studios will earn the company more profits and additional exciting games to develop.

While it’s moving slowly in that regard, Glu is scaling into emerging global markets, giving it an infinitely greater competitive advantage over the saturated app market.

C.H.A.O.S. Meter: 15/20

Chaos 04192014 nwOVERALL C.H.A.O.S. RANKING: 72/100

The Verdict: At 72 points on the C.H.A.O.S. Meter, Glu boasts strong upside potential.

It might not be a strong “Buy.” But just like with Plug Power, it does offer an opportunity for short-term gains.

And with the company’s history of surprising on earnings, you should hop in before it reports Q1 on April 30.

Your eyes in the Pipeline,

Marty Biancuzzo

Marty Biancuzzo

, Technology Analyst

View More By Marty Biancuzzo