In the first half of the year, Glu Mobile (NASDAQ: GLUU) stock has appreciated by nearly 80% and I still do believe that the growth is not over yet. It’s been a little over a year since I’ve opened my long position in Glu Mobile, and I still see that there is much more room for growth in the upcoming quarters. Because of that, I continue to hold my position in the company, as it marches towards profitability, and believe it to be a long-term play that will bring much more benefits for investors in the next couple of years.

The major thing that Nick Earl managed to achieve after he took reins of the company in late 2016 was to bring financial discipline to Glu Mobile and focus on the projects that could easily attract new active users and be royalty-free. The pipeline of growth products in the last few quarters has been increased dramatically and a number of evergreen titles has been decreased, but their quality is now much better in comparison with the previous games.

Thanks to this strategy, Glu Mobile managed to set a new quarterly record, as its revenues in Q1 were $81.4 million in comparison with $56.8 million a year before. Also, because of such an exponential growth that even surprised the management team, the company has increased its bookings guidance and thinks that it can easily achieve at least $90 million in bookings during the second quarter of the year.

Without a doubt, Glu Mobile’s current goal is to reach profitability and at the current pace of growth I believe that it has all the chances to show net profit in a foreseeable future. If we look at the recent income statement, we will see that the net loss in Q1 was only $7,2 million, while a year before the net loss was $22,7 million. Also, while Glu Mobile increased its costs, as it was required to launch new games and update its in-game content, the total operating expenses in Q1 were $57,5 million, only $3 million higher Y/Y. This shows that the financial discipline is truly being restored inside the company and the overall opportunities in the mobile gaming market suggest that Glu Mobile has all the chances to establish a stronger presence in the industry, as it slowly continues to outperform its previous results and improve its outlook.

If we look at the overall pipeline of products, we will see that the games from the growth category have started to dominate the company’s portfolio, as they almost constantly increase their bookings on a quarterly basis. The picture below shows that even though there wasn’t a lot of launches during Q1, we still saw the growth of bookings by 3.8% Q/Q.

Source: Glu Mobile IR

The main reason why Glu Mobile started to show such a solid performance in the last few quarters, is due to the fact that under the leadership of Nick Earl it started to employ a totally different development strategy that is less resource consuming and more flexible. To separate good projects from bad ones Glu Mobile uses the fast-fail tactics, which could show at the early stages of development whether the game will be successful on the market or not, thereby mitigating any monetary risk that could’ve been disastrous under the old strategy.

Source: Glu Mobile IR

Taking all of this into a consideration, we could easily come to a conclusion that Glu Mobile has fully reshaped its development process and changed the way it conducts its own business. While its returns are not as attractive as the returns of other companies, the recent explosive growth of its share price is a signal that despite its current weak financial situation, it has all the chances to become profitable in a foreseeable future.

According to the company’s three-year strategic plan that was announced at the beginning of 2017, the current calendar year is a year, where Glu Mobile will continue to build its pipeline of products that will help the company to slowly increase its Adjusted EBITDA margins. If the company manages to account $500 million in annual bookings in the next couple of years, then it could easily increase its margins to 15%-20%. And while it’s certainly not a guarantee, with the current pace of growth, the management believes that Glu Mobile could be free cash flow positive in 2019, and after that year the company could finally start to expand, as it will have available resources to invest in its in-ho use of third party projects. Because of this, I have no reason to sell my position in Glu Mobile, as the management team has already proven that it can create value and based on the arguments that were presented in this article, I see no reason why the company shouldn’t be profitable in the foreseeable future.

Disclosure: I am/we are long GLUU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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