Mobile games development is a famously fickle sector, with many companies struggling to translate short-term success into long-term results. But Glu Mobile [GLUU] and Zynga [ZNGA], two companies that have seen their stock take a beating in the past, have witnessed a recent resurgence, and may be set to buck the trend.
Following a damaging split from Facebook in 2012, Zynga – whose stable of games includes the hugely successful ‘FarmVille’ – has seen its share price rise after announcing in August a multi-year licensing deal with Disney to develop a ‘Star Wars’ game.
Likewise, Glu Mobile’s stock has risen steadily since July after it produced a solid set of quarterly results. The California-based developer made a name for itself in 2014 after creating ‘Kim Kardashian Hollywood’, which pulled in $150m in its first two years on the market.
But its struggled to produce similar results with other celebrity-focused games, due in part to substantial licensing costs, which pulled down earnings.
Now, Glu is set to launch new games, and the performance of its ‘Design Home’ has been extremely strong. With a more diversified offering, revenues for the three-month period ending in June this year reached $90m, up more than 30% over the same period last year.
Meanwhile, its stock has recorded a 100% uptrend since the beginning of 2018. Supporting the surge, Glu’s bookings also rose 20% to $99.2m in the second quarter, well ahead of its first quarter targets.
That enabled it to reduce its losses down to $4.4m in the second quarter, a huge improvement on the same period last year, in which the company netted losses of $23.6m.Bookings are the lifeblood of the sector, and Zynga’s books were also blessed in Q2 2018, hitting a record of $233.9m.
The mobile-game market is notoriously difficult to crack. According to data company Apptopia, the average lifespan for the highest-grossing games in the iOS App Store in the US is just 27.75 days.
The researchers also found that 33% of games that manage to break into the top 50 only do so for one day. Given this, both companies will now be looking to consolidate recent gains and produce sustainable growth.
Glu is targeting franchise-centric games and improving its existing titles – rather than building games from scratch – which will keep down costs. Zynga is likewise prioritising the creation of new forever-franchises and focusing on growing its live services.
However, not everyone is rushing to buy. Goldman Sachs has given Zynga a neutral rating, with analyst Christopher Merwin arguing that the company needs to produce a “hit” in order to re-rate shares upward, adding that it is difficult to predict future success in the sphere.
Analysts also noted that Zynga currently trades for 20.74 times the next 12 months of expected earnings. With net margins of 4%, Zynga’s profitability is far less than its competitors: the industry’s average net margin is 25%.
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