From Bulletin Board To NASDAQ: Who May Be Next In Mobile Apps

Apple's (AAPL) App Store now hosts 700,000 apps with 250,000 dedicated to the iPad. On Google's (GOOG) Android Marketplace, it's 530,000 mobile apps and counting. Most pundits agree that there have been one billion smartphones sold since the launch of the iPhone, and that figure is expected to swell to between four and six billion by 2016 depending on who your source is. Throw in the proliferation of tablets, and you've got an ever expanding universe of mobile applications. The mobile app market is projected to reach 25 billion dollars by 2015.

One company many investors are getting familiar with in mobile content creation is Glu Mobile (GLUU). It's gotten quite a bit of coverage on Seeking Alpha, as well as on CNBC with endorsements on their Fast Money program by John Najerian, and influential tech analyst Dan Niles during regular broadcast hours. Glu Mobile trades in the $3-$4 range, but was as high as $5.90 earlier this year. Its consensus one year target price is $6.78 according to Yahoo Finance.

If you are new to the mobile application space, or to Glu Mobile itself, you may not be aware that the company was far from the up and comer that it currently is. Just three years ago it was a washed-up equity selling for twenty-three cents a share. If you'd had the stomach to buy Glu during those dark days of 2009, you'd have yourself a fifteen bagger.

I've spent a considerable amount of time researching publicly traded mobile app content creation companies that are trying to court the attention of investors. Stocks that have some similarities to Glu Mobile when it began its turnaround campaign in 2009. To the best of my knowledge, there are only two: MEDL Mobile (MEDL.OB), and Bitzio (BTZO.PK). One is an over the counter bulletin board (OTCBB) stock, the other trades on the Pink Sheets. Including Glu, these are the only stocks publicly traded that are mobile app pure plays.

MEDL Mobile:

MEDL Mobile derives its revenues from four platforms: 1) the development of customized apps, 2) the incubation of apps from a library of more than 75,000 concept submissions, 3) the sale of advertising and sponsorship opportunities via mobile advertising networks, and 4) the acquisition of apps. On the surface, this sounds like a diversified organization, but according to its most recent 10-K, 93% of MEDL's total sales are derived from the custom development of mobile applications.

The mobile application landscape is littered with programming and design studios, so there is not a significant moat around this company. However, they have an impressive client list with large entities such as Taco Bell (YUM), Monster.com (MWW), Medtronic (MDT), Verizon (VZ) and About.com. It's nice to have a stable of top selling apps, and it's nice to have a roster of impressive clients, but the only way MEDL Mobile can differentiate itself from privately held companies is with its proprietary "Mobile Brain".

Here is the MEDL's description of this technology:

"Mobile Brain" provides a system and method for characterizing and quantifying a person's interests using a computing algorithm to assign certain lifestyle characteristics and a numerical value to the importance of a particular lifestyle trait. The Mobile Brain evaluates the usage history of every mobile app by each individual user to evaluate the user's interests. The engine then uses the data to develop a dynamic digital portrait of the user in order to recommend other applications.

Although algorithms work exceptionally well for most high frequency trading firms, and a company like Google with its search technology, things haven't fared so well for MEDL Mobile. They were short on revenue expectations this Summer, and stock has been in a race to the bottom of the charts. They are in great need of proper financial lubrication, as the stock has dropped from $1.15/share, to approximately $.20. Right about where Glu Mobile was crossing the tape in 2009. They're up against it.

Bitzio:

I had a long talk with Bitzio CEO Peter Henricsson last week. Spent about forty minutes on the phone with him, and think they may have potential just like Glu did three years ago. In fact, the two companies have similar stories in some respects. Glu Mobile was in a turnaround situation in 2010 when CEO Niccolo de Masi came on board, and began a new vision for the organization. That vision was to go strictly to smartphones, create a quality brand, and implement the freemium distribution model. So far, the strategy has paid off handsomely for Glu.

For the past year, Mr. Henricsson was working behind the scenes at Bitzio in regards to strategy, and during the Summer, adjusted the company business model. After investing a considerable personal sum in the corporation, he took over the helm. His background is in the mobile infrastructure space, so he has executive experience. The battle plan is to acquire licenses to existing fan bases, make quality apps for them, then monetize the apps. Bitzio will initially utilize a freemium model which will make money from additional add-ons to the applications, just like Glu does.

The first organization that Bitzio has partnered with is the NFL Players Association. They are set to release a trivia game where NFL fans compete against each other. This is a similar sounding story to other mobile games, but the NFL has 180 million rabid fans. Not all fans use smartphones, or play trivia games, but this is Bitzio's targeted marketing strategy. It is a joint venture, and the licensing rights are free in the partnership. Financially, it's a 70/30 split, where Bitzio gets 70% of the revenues, and the NFL Players Association get 30% - after the Apple and Google app stores take their cuts.

Mr. Henricsson explained to me that they have considerable business contacts, not just technology relationships, and are hitting the bricks to partner with additional athletic organizations. He didn't give any specifics, but you can infer that NASCAR, Major League Baseball, The National Basketball Association, English Premier League Soccer and sports like Cricket may be in the works. New licensing partnerships may be announced in the next few months.

Another part of Bitzio's business plan is to take advantage of the cult of personality that pervades our society, and make applications for entertainment stars with large fan-bases. For instance, recording artists rely less and less on audio sales, and make a considerable amount of money in merchandising. Bitzio custom made apps will connect stars to their rabid fans. Bitzio recently announced a partnership with ROAR, a Los Angeles based talent agency that also has a stake in the company.

Because Bitzio's existing apps have been downloaded 45 million times, they have a proven track record in development and design. Recent acquisitions of app development studios Knucklehead and ACT Software, as well as animation studio Motion Picture Corporation, gives them the talent and studios to produce everything in-house. Maybe fortunes are changing.

Conclusion:

Both Bitzio and MEDL Mobile trade for under twenty-five cents. If you are thinking of economizing, and purchasing a small stake for a quick killing, buyer beware. There's a reason they trade for a quarter. Twenty-five cents can fall to twelve cents. You may think you're not losing much, but that's 50%. They are small, unproven business' that happen to reside in an explosive growth sector. This doesn't mean they will succeed.

Investing in stocks for under $1 is out of my comfort zone, but you may feel differently. They both have a toehold in the mobile app space, but they're always on the fringe of going private, going bankrupt, or going nowhere. They could also be scooped up by a larger entity, and you'd make money in a heartbeat.

Both stocks have extremely low volumes which makes it difficult to get in and out of positions if you are a day-trader. Always use limit orders with any stock, but especially these two, or any bulletin board security. If I had to pick between the two, I'd invest in Bitzio. My personal preference is to stick with a proven winner like Glu Mobile. If either Bitzio or MEDL Mobile start to execute, I'd rather buy them for a buck than pennies on the dollar. .

Glu Mobile: The Only Game In Town

It's no secret we're experiencing a seachange in personal computing as people migrate from PC's to tablets and smartphones. By no means is the personal computer dead, but growth has diminished to a trickle, and that's being generous. Technology bellwethers Hewlett-Packard (HPQ) and Dell (DELL) have experienced tremendous pricing pressure on their shares as a result.

The question remains, where do you want to invest to take advantage of the proliferation of handheld devices? The most obvious answer is either Apple (AAPL), or, Google (GOOG) with the iOS and Android operating systems. However, they are large cap equities, and although their runs may not be over, they have become very large organizations where market capitalization is concerned.

My preference is to take advantage of the smaller content providers, the companies that supply the applications for the new wave. Enter Glu Mobile (GLUU), one of the leading game application developers for portable devices. In fact, you'd be hard pressed to find any other publicly traded pure play on the major stock exchanges. I had the opportunity to interview Eric Ludwig, mobile industry veteran and CFO for Glu Mobile. The interview was coordinated by Glu's Communications Director Jason Enriquez.

Here is the paraphrased conversation I had with Mr. Ludwig:

Question: Earlier this year, you released a game in several different languages. Is this going to be a continuing strategy for Glu Mobile with additional titles? How does this work in regards to the development team? Do you have to reprogram the entire game, or just the audio? How does this help your bottom line from an R&D perspective?

Eric Ludwig: We've been localizing from the earliest part of this year in numerous languages. It's not really audio. Most of the localization is textual based. The way we develop our games is we have our language files and look-up files, so it's relatively easy for us to add multi-languages for our games. So in that respect, the incremental work for us to get five or six or seven languages within our games is a diminuimus amount of extra work.

Obviously, having localized content is a benefit for countries where both English speakers, and foreign speakers that have English as their main language. This is countries like Japan, Germany, China, France, Spain, and Korea. They'll be served up the English version of the game, but if they have their settings set up to a language that we support, then they'll be served up the game in the local language.

Question: How do you determine which games to distribute internationally?

Eric Ludwig: Little Kingdom was our first foray in Q2, and now all of our titles on a prospective basis are being localized to some level in several languages. We're doing anywhere from four to eight languages per title. In some cases, it may be one or two languages that launch, and then the version 1.1 will be updated.

Question: I know you have development studios all over the globe. How do you determine if you are going to develop a game for a country like China, how do you determine what the tastes are for that particular county?

Eric Ludwig: We've been in mobile for eleven years, and it's been clear to us that the opportunity costs, the ROI, really is not there to do a country specific title. You won't see us doing a Chinese only title for China. Our title roadmap, even though we have studios in many countries such as China, India, Canada, Brazil, Russia, and the United States - even though we have those locations, we develop titles that can ship globally.

Our primary distribution channels are global app stores, Apple App Store, Google Play App Store, Amazon App Store (AMZN). These are distribution channels that we can publish one time, and can be distributed across the globe.

Question: It is well documented that China is going to be a much larger mobile market than the United States. How does China, or even India fit into Glu Mobile's plans?

Eric Ludwig: In our studio in China, we have two to three development teams that are creating games that are heavily influenced by the Chinese gaming market. We just recently announced and launched Eternity Warriors II which was developed in our China studio. It has a very similar game play experience as Asian games.

China is a big opportunity for us. We've been in China over five years, and we have over 100 people in Beijing developing and supporting games for the Chinese office. If you look at the Chinese Apple App Store on pretty much any given day, we'll have three to have five of the top 100 grossing games on there.

Question: You recently acquired GameSpy Technology to buttress the Glu Mobile social gaming and multi-player experience. How do you foresee this new addition in helping the Glu Mobile brand as you move forward in not only the domestic, but the international markets as well?

Eric Ludwig: We're very excited about GameSpy. It's a business we picked up for virtually for free. We paid 2.8 million in shares for it. It came with $900,000 in cash. It came with $1.3 million in accounts receivable that we will collect. It came with $500,000 of net book value assets which were 500 servers and a data center. So we essentially got it for free. Very pleased with that, and a business that is very core to our strategy. Glu has historically been closer to a single player freemium gaming company with some experiences in multi-player and experiences social gaming, but they weren't at our core, social gaming and async or sync PVP (player vs. player).

GameSpy has been around for twelve years. They've been supporting console and handheld games to do sync and async, player vs. player, co-op and competition mode, voice chatting, text chatting, and leader boards. We think they going to be a fantastic opportunity for us to integrate them into our roadmap at the end of this year, and next year, as we add more PVP and social mechanics into our games.

Question: Is there much of a language barrier in multi-player games, or is it all visual and a gamer in Hong Kong will do battle with somebody in San Francisco or London?

Eric Ludwig: One of our fist steps into multi-player would be a game like Indestructible which we launched about two weeks ago, high graphics, 3D, fully real time multi-player where four people are in an environment playing together. That game has no texting or chatting during the game. It's all real time multi-player. It's all visual in that regards. The instructions within the game itself, if you are Chinese you will be seeing them in Chinese, and if you an English speaking player, you will be seeing them in English. It's unknown to the other players which language you prefer. It's all visual.

Question: The new iPhone 5 has a much larger screen than earlier versions. Does this effect the way you develop games, such as having to increase the aspect ratio, or does the utilization of vector graphics mean it's one size fits all?

Eric Ludwig: For the last two year all the games we've shipped since we've started our freemium model, everything we do is developed for the largest devices, the iPad. More recently when the iPad came out with retina display on the large sized screen we supported that at launch as well. The fact the iPhone has gone to a larger screen with retina display is no extra work for us. We just shrink down the retina display build from the iPad to fit the iPhone retina display, so there is no incremental work for us. They are optimized for the larger screens with the retina display.

Question: There's been an explosive uptake in tablets the past year and looks like it's going to keep growing. How do tablets figure into your overall growth story?

Eric Ludwig: We're a two screen company today, the phone and the tablet. What's great about both of them is that they are two separate and unique markets. There are 5 billion phones out in the market today, and only one billion of them are considered smartphones. Most people replace their phones every two to three years, so we are seeing a large upgrade cycle from one billion to multi-billion devices forthcoming.

In addition to that, tablets are companions to phones, they're replacements for laptops and PC's, not cannibalizing phones. They are just in the first inning of growth, and that's the second screen for us. Since tablets came out two plus years ago, we were there at the launch. Our games are optimized for these devices. For Glu Mobile, our focus is on very high end graphical content, which we think is becoming more and more important. Because of that, our games look phenomenal on the bigger devices.

Question: Does NFC (near field communications) capabilities in some smartphones pose an opportunity in your overall plan? How so?

Eric Ludwig: We were a launch partner with Google, as we are with most things Google, on their Google Beam technology which we announced last February at the Mobile World Conference in Barcelona. Yes, we know how to, and will support NFC. However, in mobile until there is large user adoption, we are not going to be bleeding edge. Doing an unimplemented, no user base adoption is not in our immediate plans. We really need to have large user bases before we go all in to adopting a new technology.

Question: Both Apple and Google have their sights on the home with speculated Android and iOS televisions. From what I understand, they would let you use applications on flat screen HDTVs. How would the advent of say an Apple TV effect your overall game plan?

Eric Ludwig: Today, if you have an Apple TV with a 60 inch screen, given that all of our games are developed for the iPad in retina display, you can play all games from the tablet on the 60 inch television. Remember, an iPad with retina display has more pixels than the 60 inch television. So already all of our content looks fantastic on that TV. Once they figure out what the gaming controller for the Apple TV and Google TV will be, and the delivery mechanism will be, you can certainly expect Glu to be a third screen company.

What's great about Glu's content versus some of our other public social/mobile gaming competitors is that there are some games that are asynchronous, player vs. player as in some farming games, and some other games that are attuned to you playing by yourself with your friends in a remote location. With our content, even our single player games, and especially our multi-player games, they are very well situated and created to have say three buddies sitting on a couch with your tablets in a living room. Our games are created for a same room multi-player environment.

Question: What do you think the gaming environment will be like in two years from a Glu Mobile perspective?

Eric Ludwig: It's no secret that there is going to be a battle for the living room like there is a battle for the smartphone and tablet today. What's great is that we are deep partners with Apple and Google. As they take their brands, storefronts and technologies to other opportunities, we'll certainly be there to support it.

Two years is a long time in mobile. Mobile nowadays is advancing at the speed of Moore's Law, where hardware is doubling every 18 months in the terms of computing power. A very important theme that Glu has been talking about for over a year now is that the networks are not evolving that fast.

We've been very vocal over the last year that HTML5 was not going to be the panacea of gaming. We did not put a lot of investment there. When Mark Zuckerberg and Facebook (FB) come out and say they spent too much time on HTML5, and over invested there, I think it validates our way of thinking.

We certainly see us buying GameSpy as having us focus on social connectivity. Glu has already pushed the envelope as far as we probably need to in the short term on high end graphics visuals. Whereas most of the social mobile gaming competitors we have are primarily in 2D.

To where I see the opportunity for Glu is to maintain our visual prowess, but focus on monetization, focus on social virality leveraging the games by technology. We already have scale on development teams, and we have scale on 3D graphics where we think the market is going. That will set us up for success.

Conclusion: Warren Buffett once said: "I'd rather have a good company at a fair price than a fair company at a good price.". At $4/share, I believe you're getting a fair price on a good company in Glu Mobile. It's trading right in the middle of its 52 week range of roughly $2-$6. Although Glu isn't profitable right now, you're paying for future growth. Average analyst estimates for 2013 is $.18/share. Sales growth is expected to be 35% next year, and this is in a market that is ready to take off. If you want to bet on the future of mobile gaming, this may be your best bet.