$GLUU Why Venture Capital And Insiders Are Buying Glu

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Jan 28, 2013 at 9:33 AM

$GLUU

[b]Why Venture Capital And Insiders Are Buying Glu Mobile[/b]

http://seekingalpha.com/article/1136951-why-v...e_readmore

Conclusion

In just two weeks, Glu Mobile will report 2012 full year financial results on February 5. Guidance is for revenues of $87.4 million (an 80% year over year increase in smartphone revenue) with a year ending balance sheet of $21.5 million in cash and no debt. Going forward, the company is also planning to guide for quarter over quarter adjusted EBITDA improvement in Q1 2013 from Q4 2012. More importantly, we expect to hear forward guidance about Glu's 2013 retooled game road map which includes the integration of recent acquisition Gamespy into more games and the integration and vision of recent hire, Matt Ricchetti as the President of Studios. Risks going forward would include Glu's ability to release profitable games in 2013 with high monetization rates unlike the weak Q3 2012 releases where 9 of 11 games were deemed failures. Gamespy and Ricchetti's experience in monetization should improve new game release prospects in 2013.

Without the ability to predict the future, we have been given many recent clues as to what Glu's funders and leadership expect for Glu in 2013. The CEO, three directors and venture capitalists are investing heavily in the $2.25 - $3.24 range with large insider buys before the February 5 earnings conference call. Clearly, these individuals and institutions who know the company the best consider the stock extremely undervalued. With a current share price of $2.30, investors can follow the lead of insider venture capital and buy at a 25% discount to Hany Nada's 3,243,218 share purchases ($3.05/average) just over 100 days ago.

One can also speculate that GGV and Hany Nada have reinvested back in Glu because they expect the company could be a potential takeover target just as other Nada-led investments have been as referenced earlier. For years, Nada has anticipated M&A and consolidation in the gaming sector as evidenced by his remarks to the Silicon Valley Business Journal and 2013 may be that moment for Glu:

"You don't need 65 mobile game companies," he says. "You maybe need 10. The problem is there are so many ways to deliver the games ... You'll see a lot of game companies because of that. But over time they shrink and that is happening right now. There are a lot of consolidations right now. And as M&A goes on, you'll continue to see a consolidation in the marketplace."

With the revenue multiple range of 4X-20X for GGV/Nada funded companies acquired in M&A, prudent observers notice this great track record of identifying, funding, and exiting at top values. If Glu followed this path and received only a conservative 4X multiple (on 2012 revenues of $87 million), Glu could be acquired at $348 million or $5.04/share based on 69 million shares outstanding. Under that scenario, investors buying now (in the $2.25-$2.30 range that the CEO and directors just paid) would realize a 118% gain.

My plan is to hold my large GLUU position (added to most recently at $2.29) and watch for Nada's exit value to be reached via acquisition or share price appreciation. With his great track record, history tells me Glu Mobile will not remain at this low $150 million market cap for very long or even the $200 million market cap ($3.00/share) where Nada was comfortable reinvesting again in Glu. Thanks to required public filings by Hany Nada as a GLUU insider, I'll be watching every move he makes and so should you.

Glu Mobile offers a great risk/reward profile going into 2013. The downside should be at the 2-year support lows of $2.00 (-13%) while the upside is $5.00 (+118%).

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