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Glu Mobile Reminds Investors Why Mobile Gaming Is a Fickle Industry

Harsh Chauhan, The Motley Fool

Its deja vu for Glu Mobile (NASDAQ: GLUU) investors. The company's habit of delivering solid growth in some quarters and then fizzling out once its games lose their luster hasn't gone away despite the company's efforts to build sustainable titles.

This is evident from Glu Mobile's second-quarter earnings report, which was bad enough to trigger hysteria among investors. They didn't bat an eyelid before offloading the stock in droves earlier this month. So are Glu Mobile's wheels really coming off, or is this another temporary setback before growth resumes? Let's find out.

Man holding his head in front of a crashing stock chart.

Image source: Getty Images.

We got a major problem here

I had pointed out in my earnings preview that Glu investors should keep a close watch on the company's bookings figure, as it provides a clear insight into where the business is headed. Sadly, the mobile game provider's bookings guidance failed to pass muster.

Glu Mobile estimates that its full-year bookings will be in the range of $406 million to $410 million. This is a substantial downgrade from the company's earlier bookings guidance range of $445 million to $455 million issued in May.

As bookings represent the money Glu's customers have committed to spend on the company's games, the metric provides an idea about how much revenue it's going to generate. So the lower bookings guidance was something that investors didn't want to see, especially at a time when the company has launched new games.

Are new games failing to bring in the dough?

The fact that Glu has downgraded its annual bookings guidance despite launching WWE Universe and Diner DASH Adventures has rattled investors, because they would have originally expected the company to raise guidance.

But now that Glu is backtracking, there's a possibility that its new games aren't performing as well as the company was originally expecting. COO Eric Ludwig admitted this on the latest earnings conference call:

Turning to our expectations for the back half of 2019, there are several factors that are contributing to our guidance revisions. First, we only expect a modest contribution from WWE. As I stated in early June at the Baird conference, this title was not exhibiting sufficient LTV [lifetime value] to justify scaled spend on [user acquisition].

As a result, Glu has decided to shift its spending toward the other title -- Diner DASH Adventures -- because it shows promise. So just one misstep on Glu's part was enough to set the alarm bells ringing, and this shows the fickle nature of the mobile gaming industry.

A hit game can turn out to be a golden goose, but if a title fails to win over users, the investment that went into developing it goes down the drain. However, the company believes that fiscal 2020 will be a much better year thanks to the launch of certain new titles, including a Disney-based game and the launch of a new Deer Hunter. Given what investors encountered in this latest quarterly report,  failure of any one of those games to hit the right chord with consumers is going to be a major headwind.

However, there's no denying that the stock's latest drop makes it look like an attractive bet, as the company is still on track to deliver an improved financial performance this year.

Glu's 2018 bookings came in at $385 million. This means that the metric could grow in the mid-single digits despite the mishap with WWE Universe. And considering Glu stock trades at only 11 times forward earnings, it could prove to be a good buy at these depressed levels. That multiple is well below its five-year average price-to-earnings ratio of 20.

However, the caveat that investors need to keep in mind for this kind of company is that if Glu Mobile fails to win over gamers with each new title, there's likely to be near-term pain in the market.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends DIS. The Motley Fool has the following options: long January 2021 $60 calls on DIS and short October 2019 $125 calls on DIS. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com