I've found and interesting small cap company operating in the
mobile technology industry - one that stood out from the pack
because it has morphed two trends into one business model for those
on the go.
But there's a catch: This microcap company is looking to make
money by giving away their products.
Sound far-fetched? Not really, if you think about other consumer
product companies. After all,
Procter & Gamble's (
Energizer Holdings' (
Schick brands don't make money off the razor handles that they
package with the razor blades - they're counting on repeat blade
sales to drive profits.
The razorblade comparison isn't far off in terms of widespread
use either. Cell phones have become an integral part of many
people's lives, especially smart-phones. With integrated browsers
and apps to meet any mobile need, we're using our phones to stay in
touch with friends and family, check e-mail and play games.
The company I'm looking at is
Glu Mobile (Nasdaq: GLUU),
a small cap company that develops games for handheld units.
The company changed its profit strategy once Niccolo DeMasi took
over as CEO a year ago. Rather than trying to make money off the
mobile market by selling its popular games, Glu Mobile now tries to
sell the concept of microtransactions. It's generating revenue from
millions of smaller in-game transactions, usually of a dollar or
less, and from in-game advertising.
Glu Mobile's concept is that the users pay their fare for the
software by buying add-ons, trinkets and little things that enhance
their playing experience in a social atmosphere. By melding the
type of game-playing you might encounter over a network using a Wii
Nintendo (OTC: NTDOY.PK)
or an Xbox from
Microsoft (Nasdaq: MSFT),
with the mobile devices that we depend on, Glu is banking on
becoming the ruler of a mobile social-gaming kingdom.
***Glu Mobile is not a newcomer to gaming - the company is
actually celebrating a decade of development this year. The company
went public in 2007, but the stock raised some eyebrows on January
11, when it announced a secondary offering of 7.3 million shares at
$2.05 apiece, a deep discount from the $2.34 price where they had
been trading. The company plans to use the $13.8 million to speed
up development of its gaming community, which is actually a good
use of the money.
Glu has an impressive portfolio of top-rated games that includes
Beat It!, Bonsai Blast, and Super K.O. Boxing! It also turns brands
from partners including Activision, Atari, Hasbro, Microsoft, SEGA,
Sony and Warner Bros. into games.
Under the Glu social mobile model, gamers can go head-to-head in
shoot-'em-ups like Gun Brothers, or take control of toys with
Toyshop Adventures. In December 2010, Glu said its Gun Brothers was
approaching 3 million downloads, averaging 175,000 a day.
***By switching its strategy to free-to-play, Glu got a head
start over its bigger competitors. Moving forward the company plans
to release 25 titles each year.
Since DeMasi took over the company's share price has doubled,
and its cash position has improved. On January 6, 2011, Glu
Mobile's stock hit an all-time high of $2.90, right after
announcing at the Consumer Electronics Show a partnership with
Nvidia (Nasdaq: NVDA)
to develop games for
Google's (Nasdaq: GOOG)
Glu Mobile still hasn't reached the sweet spot of profitability
and has had to tap into the equity markets to raise cash. That
always makes investors nervous, but considering the long-term
growth potential it appears that the equity raising strategy (vs.
debt) is probably the better option.
In addition to the recent stock offering, the company received
$13.5 million from a private placement in the summer of 2010.
Glu Mobil cut its losses in 2009 to $18.2 million, and
indications are that it will report a smaller cash burn for 2010.
For the three months ended September 30, 2010, Glu reported a $1.6
million loss, an improvement over a $4 million loss in the year
With its substantial roster of games and an improving revenue
picture Glu Mobile could become a takeover target. Recently
old-line Publishers Clearing House announced that it was buying
Funtank, which creates online video games for companies including
The Walt Disney Co. (
Toyota Motor Co. (
Glu Mobile may be on the cutting edge of gaming technology, and
it appears to have put in place the financing needed to grow. At
the current price, it's definitely worth investigating.
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