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:GLUU   00:00AM GMT
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Glu Mobile is Different, Compelling and Growing



While my favorite gaming company is Electronic Arts (EA), Glu Mobile is a gaming company and is different than almost all others in one very unique way; more on that in a sec. The company publishes and markets its portfolio of games for mobile users (smartphones and tablets). The stock has been punished of late, down over 30% in the last three-months and its bearish momentum shows horrific technicals right now. In 2014 there were whispers that the company was indeed a one-hit wonder with its "Kim Kardashian: Hollywood" game but the company completed acquisitions of a number of firms namely, Pick 6 Studios, Play First Inc., and Cie Games Inc.

GLUU competes with Zynga (ZNGA), Electronic Arts (EA) and King Digital Entertainment (KING) in a crowded gaming segment. As of right now, it's fair to call GLUU a "middle of the road" performer with extraordinary growth potential. Here are the head-to-head comparisons of GLUU versus Zynga (ZNGA) and GLUU vs King Digitial (KING).

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➜ GLUU generates $0.91 in revenue for every $1 in expense, which is poor and considerably below the sector average of $1.07.

➜ GLUU generates $360,000 in revenue per employee which is above the sector average of $344,000.

While the company's fundamentals show some strength in most areas, they also show two particular weaknesses that we will address. In the latest earnings release on August 6th, 2015, the company beat the consensus with $57 in revenue versus estimates of $51 million. EPS also beat, with a reported $0.01 of non GAAP income versus estimates of a $0.04 loss. While that sounds good, the stock collapsed off of the report falling from $5.67 to $4.50 the day after earnings for a 20% drop.

The disastrous stock reaction reflected the company's forecasts of $58 in revenue for the next quarter and EPS to be between breakeven and a $0.02 loss, versus estimates of $73 million and EPS of positive $0.04 (EBITDA was also a huge miss in terms of the forecast). The revenue downgrade was substantial and continues to point to the risk of lack of transparency for gaming companies which rely on a small portfolio of assets for growth.

I remind all readers that a report just like this one is available for any company for free on No e-mail. No login. Free. Forever. Period.

GLUU's revenue (TTM) has risen for more than five consecutive quarters. One year ago the firm reported $142 million in revenue. For the most recent year it reported $263 million (a 85.3% one-year rise). Two-years ago the firm reported annual revenue of $101 million (up 159.5%). So growth, even though forecasts were taken down, is enormous. That's just a fact.

Technicals   |   Support: 4.46   |   Resistance: 6.1   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

GLUU has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 263 142 101

Operating Margin (QTR) 0.91 1.00 0.82 FALLING

Net Income (TTM US$ Millions) 7 -15 -19 RISING

Levered Free Cash Flow (TTM US$ Millions) 28 3 -4 RISING

Research and Development (US$ Millions) 18 14 11

Research and Development Expense/Revenue 0.326 0.352 0.468 FALLING

Stock Returns and Chart

GLUU is down -32.3% over the last three months and down -8.5% over the last six months. The stock has returned -15.1% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 263142101

This is the "good news" for GLUU, and it's not trivial. Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case it's seven consecutive quarters).

When a company grows revenue 85% year-over-year, we must recognize the added importance of top-line growth, perhaps even above and beyond earnings, free cash flow and margins. Regardless of the low(ish) 3 fundamental (star) rating, if revenues continue to explode, everything could follow suit for GLUU.

I note that GLUU has broken an all-time revenue high (TTM) for seven consecutive quarters and now stands at over $260 million in the trailing-twelve-months.

What do all these numbers mean?
GLUU's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below. Note that the green bar represents the all-time high.

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Operating Revenues/Operating Expense 0.911.000.82FALLING

This is the worrisome part of GLUU's financials. Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter GLUU showed a ratio of 0.91. Not only is the ratio below one, and falling, but further, this ratio hasn't been this low since the quarter endinng September, 2013.

What do all these numbers mean?
One year ago Operating Revenues/Operating Expense was 1.00. In the last year we can see operating margins are decreasing and less than 1.0 for the most recent quarter (below the critical level).

GLUU's fundamental rating was affected from the operating margin numbers in the following ways:
1. The current value is below the critical 1.0 level (the firm generates an operating loss).
2. The one-year change was negative (lowers the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

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Net Income (TTM US$ Millions) 7-15-19RISING

Net Income (after tax profit) over the trailing twelve months (TTM) for GLUU is rising, but that's not the issue. For the most recent trailing-twelve-months (TTM) the company reported net income of $7 (million). While the annual rolled up numbers look nice (and positive), the quarterly results are slipping, down now for three consecutive quarters, including the first quarterly loss in that time period.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago), but that dipping orange line, which is the quarterly result.

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Research and Development (US$ Millions) 181411

Research and Development (US$ Millions) is trending higher meaning that for at least five consecutive quarters, it's been rising (in this case, nine consecutive quarters). R&D is up 27% year-over-year and 60% from two-years ago. This is where GLUU stands apart from KING and ZNGA. Both of those firms have stopped increasing R&D or actually cut R&D. GLUU is doing the complete opposite, and of all the bullish arguments for this company, R&D may be the strongest.

We see a strong, consistent trend of R&D expense (investment) and that is the life blood of most technology companies, but in particular a gaming company.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars. Note the rising bars from one-year ago and the green bar, which represents the all-time high.

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GLUU mobile has broken free from its revenue base in 2014 in part through organic growth and in part through acquisition. While revenue forecasts for the next quarter were taken down, it's simply a fact that revenue growth is still booming, free cash flow is positive (over the last year) as is net income. The company's mode of operation is considerably differentiated from its peers ZNGA and KING as it pours money into R&D to keep a healthy pipeline growing. The greatest concern, beyond what the "next big thing" will be, is a diving operating margin that has the company paying $1.10 for every $1 in revenue. Whether the bullish or bearish thesis has caught your eye, GLUU does present a different and compelling company in the mobile gaming world.

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