Glu Mobile: Coming Unglued...

by Sonya Colberg, Senior Investigative Reporter - 10/7/2014 9:51:39 AM

Kim Kardashian and crew’s fading “reign of terror,” first grabbed the imagination of mainstream media less than a year ago. It seems Ms. Kardashian’s post-baby bikini shot plastered on US Weekly’s cover sold 100,000 fewer magazines than usual and sounded the warning that the star’s popularity is beginning to drain away quicker than you can say, “Snap a salacious selfie!”

That’s downright depressing news … for Glu Mobile (GLUU).

The 13-year-old San Francisco, Calif. mobile game maker’s free game Kim Kardashian: Hollywood initially rocketed the share price to the stars from $3.78   to $7.47, higher than any time since 2007. 

But most investors didn’t realize that when the company launched the game app on June 25, GLUU arrived late to the Kardashian party. 

Ms. Kardashian’s fading stardom is just the beginning of an A-list of slipups that we believe make GLUU stock an ugly bet:

*SLIP-UP NUMBER 1 - Kim Kardashian has taken a dramatic free-fall since the game’s debut. 

Downloads of the Kim apps have fallen, reflecting the namesake’s fading popularity. The download rank is trending downward. Kim captured number 69 overall in iPhone download ranking in early September, as the chart below shows. But the ranking has tumbled precipitously to number 163.

 

Money spent on buying items as players engage in the game is reflected in the similarly unattractive picture painted by US overall grossing rank shown below.  While there has been a slight weekend recovery, in one month, Kim’s ranking fell head-over-stilettos from number 5 to number 15. The dips keep falling lower under this declining trend.

 

 

Kim Kardashian: Hollywood revenue has been falling since July, TheStreetSweeper has found. Bad news for GLUU’s big hit. 

“As long as Kim’s stardom on mobile ranking charts continues, we anticipate speculative investors will hang on for the ride,” wrote a Benchmark analyst on July 31, explaining the drop from buy to hold. “But a slip on the runway will likely create valuation pressure over rationalized performance expectations and the necessity for the Company to generate the next big hit.”

Now that the madcap wedding, quickie divorce, rapper wedding, baby bump and post-baby-body flaunt dramas are over and Kim begins to settle into middle-aged momma-ville, viewership of “Keeping Up With The Kardashians” is reportedly spiraling downward. If this media slip for Ms. Kardashian continues, the ranking of her namesake game could sag even more.

*SLIP-UP NUMBER 2 – Last week’s hype about the Kim Kardashian game being distributed by Facebook is another indication that GLUU is slipping.

“Nobody plays games on Facebook anymore,” said a mobile games analyst who requested anonymity. “It’s quite well known in the industry that Facebook has moved away from games.”

Zynga (ZNGA) offers the best example of the insignificance of a Facebook distribution because when it went public in 2012, its games were distributed on Facebook. Zynga shares flew to the $9-$14 range but after Facebook moved away from games and other issues arose, Zynga collapsed to the $2 range where it remains stuck today.

So the announcement that Kim is now available on Facebook likely will amount to little more than distracting hype. 

*SLIP-UP NUMBER 3 – Insiders yell, “Sell! Sell! Sell!”

Words to live by in the mobile gaming space: hit-driven business.

“If you have a hit, you’re good,” an analyst said. “But when the hit goes away, you better find another hit or you’re in trouble.”

Insiders know the hit won’t last. That’s the reason we believe they have been selling shares faster than Kim can bat those bodacious eyelashes.

So insiders have done nothing but sell for a long time, racking up nearly $1.5 million in sales just since Aug. 1. Chief financial officer Eric Ludwig and vice president of finance Gregory Cannon, directly and indirectly through automatic trading plans, significantly pared down their holdings in just three days as they sold a combined total of 268,042 shares.

Likewise, institutional shareholders know the good times are too short in this business to even bother getting into it, as shown by the limited institutional shareholder base.

SLIP-UP NUMBER 4: Recent GLUU games are falling apart.

In an attempt to stem Kim’s decline, GLUU last month launched “Amazing Battle Creatures,” which is already losing the battle and shouldn’t be counted on to make a significant contribution to sales. In just a few days, the rank dropped precipitously from 79 to 827.

 

Other big GLUU games are having issues, too. Dino Hunter: Deadly Shores appears headed for extinction. Deer Hunter 2014 and Eternity Warriors 3, both expected by the CEO to make “a solid contribution,” failed to hit the top 100 mark in the case of Deer Hunter, while Eternity’s ranking dropped miserably from 189 to 729. 

SLIP-UP NUMBER 5 – GLUU pays multi-millions for game maker in saturated niche; its top racing game then skids.

On July 30, GLUU announced the purchase of Cie Games for about $100 million, or $30 million cash and $70 million in shares. 

GLUU chief executive Niccolo de Masi trumpeted the opportunity to drive home more revenue with “Racing Rivals,” the better of only two games published to that point by Cie. 

But Benchmark saw big problems, writing the same day of the acquisition announcement: “The racing genre is saturated in our view, a negative competitive profile that will likely challenge current and future products, with limited opportunities for lasting differentiation.”

In fact, the chart below shows “Racing Rivals” has not run a good race since GLUU acquired it for that mountain of money. Just a few months after the acquisition, the game ranks only about 317, a severe decline in popularity from 195. 

 

 

Now it looks like the acquisition has all the trappings of Zynga’s disastrous $200 million acquisition of OMGPop. Just a year after plunking down top dollar, Zynga had to shut down the studio that made the once wildly popular “Draw Something.” Zynga’s stock suffered a more than 56 percent decline, collapsing from about $6 to about $2.60, the current range.

 

*SLIP-UP NUMBER 6: GLUU follows the shaky lead of three suffering gaming companies. 

Rovio’s once-roaring Angry Birds game has fallen in rankings since its 2011 debut, prompting last week’s announcement that 16 percent or 130 staffers will lose their jobs.

 Apparently recognizing the blockbuster was a viral one-hit wonder, the CEO blogged, “We’ve been building our team on assumptions of faster growth than have materialized.” He added it’s “very tough to produce consistent hits.”

Likewise, Zynga got ahead of itself with FarmVille’s early massive success and wound up laying off 520 employees last year. And King Digital Entertainment’s (KING) “Candy Crush Saga” downward trend in rankings virtually predicted the accompanying crush in profit and revenue. King trades for about $12 – about half the price fetched at its initial public offering just seven months ago. 

With those heady revenues from one-hit wonders burning up their companies’ pockets, game makers tend to go on spending frenzies, building more complex companies in search of another evasive big hit.

But the hits don’t always keep coming. Yet many analysts’ models imagine GLUU popping out hit after hit. History shows that’s just unrealistic.

CONCLUSION – 

Kim Kardashian shocked everyone with the game’s initial popularity. GLUU’s stock price zoomed up, the company raised $30 million in a public offering and then promptly threw much of it away on a pricey acquisition that already appears to be spinning into oblivion. 

Insiders - aware Ms. Kardashian’s app is fizzling right along with her popularity – are selling off huge chunks of shares before the average investor can put two-and-two together. 

Other gaming companies have been unable to stem the downfall after their big hits fade and they fail to find another blockbuster. With Kim Kardashian fading fast, other GLUU games following course and all the other slipups, we wouldn’t be surprised to see GLUU lower fourth quarter guidance. 

And GLUU is looking more and more like a nearly $500 million fad that fickle retail investors will dump so they can chase the next big fad.

All in all, we may not have to stick around long before GLUU falls apart.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in GLUU and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to  [email protected].

 

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