Tag Archive GLU Mobile

Netmarble IPO: How Greed Destroyed Its Kabam Acquisition

Lawrence Abrams No Comments

Netmarble is the ninth largest mobile app game publisher in the world and the largest in South Korea. In a month, the company is set to raise $2.3 Billion via an IPO on the KOSPI Korean stock exchange.

If successful, the company will be valued at $11.7 Billion and catapult it to the level of Supercell and MZ (formerly Machine Zone) as one of the top 3 most highly valued mobile game companies in the world.

Our analysis of this IPO, indicated that expectations for revenue doubling in 2017 has been fully priced into the IPO price of 157,000 Korean Won  / share or  $138 USD / share (based on conversion of .00088 USD / Won).  We recommended staying away from the IPO, and look for an entry point 36% lower, or around $86 / share USD.  

While doing research on Netmarble, we began to see that the aggressive pricing of its IPO was not the only instance of what we considered to be a pattern of greed as defined by making choices favoring short term gain at the expense of long term gain.

For one, Netmarble had a history of overworking its Korean workers.  So much so that employees pulling “all nighters” before every game patch started calling its highrise HQ in Seoul  “the lighthouse”.  

As Netmarble’s IPO date grew nearer and investor scrutiny intensified, the company changed its work hours policies, saying it would ban “all nighters” and weekend work.

The purpose of this paper is to explore in detail another instance of Netmarble greed:  how it has managed a recent $710 Million acquisition of the Vancouver studio of the fallen USA mobile game unicorn Kabam.

Netmarble has repeatedly stated that its long term growth strategy hinges on growth outside S. Korea.  This includes localizing its Korean hit game Lineage II: Revolution for the Chinese market. It also includes acquisitions of studios in the West with games generating $100+ Million in annualized revenue (ARR)  like Kabam’s Marvel: Contest of Champions (MCOC).

Our interest in Netmarble stems from a long running interest in Kabam.  We have followed the the ups and (mostly) downs of Kabam for the last three years, focusing mostly on valuations based on App Annie app store revenue rank trends. Below is a list of our articles chronicling the fall of Kabam and its causes.  They are available on our blog GloMo Investing:

On October 18, 2016, VentureBeat reported that an unidentified company had made an $800 million offer for Kabam’s Vancouver studio.  That studio had been responsible for the only game keeping Kabam alive at the time:  Marvel: Contest of Champions (MCOC).  

The Vancouver studio also was valued for the game engine behind MCOC and for the hit potential of another game in final development based on Transformer IP licensed from Hasbro. At the time, MCOC was a #9 revenue ranked game with our estimated global annualized revenue run rate (ARR) of $250 Million. We noted at the time that the bid seemed right for a studio + hit game + game engine as long as the two-year running MCOC could sustain a $250 Million ARR.

On December 19, 2016, it was announced that Netmarble was the successful bidder. The bid was later officially pegged at $710 Million based on Netmarble’s IPO filings in late March 2017.

Throughout 2016,  Netmarble talked about an IPO.  It played up its plans to use  the proceeds from the IPO  to buy USA-based companies knowing that the mobile game market in the USA was four times that of S. Korea.  It was especially important for Netmarble to demonstrate its acquisition prowess before its IPO, given that it had narrowly lost a bid for the social casino game company Playtika in June 2016.

What follows is a closer look at the way Netmarble has managed two major software releases since it closed the deal for the Vancouver studio just two months ago. It is evidence of a kind a greed that favors short term monetization over long term player engagement.

The first instance of a disastrous release — the now infamous MCOC Patch 12.0 — was released on March 1, 2017 just one week after Netmarble closed the acquisition on February 23, 2017.  The other was the design and release schedule of Transformers: Forged to Fight (Transformers).  

Even though development of both started before Netmarble took over, the final releases were made on their watch. Netmarble could have stopped these releases, mandated more player friendly designs that would sustain engagement even if that meant less revenue in the short run.  But they did not.

Using the AppAnnie iOS USA app store revenue rank trend line below, we will show the context and likely rationale for MCOC Patch 12.0.  

MCOC was first released 2 ½ years earlier in December 2014.  Five month later in May 2015 the game cracked the Top 10 revenue rank (first red line).

It remained a consistent Top 8-10 revenue rank for a solid year until July 2016 (second red line) when it started a slow fade down to a Top 10-15 for the second half of 2016.  Patch 12.0 went live on March 1st (third red line).  

Player criticism was instantaneous led by a YouTube video entitled “Patch 12.0 is Terrible” by MCOC Youtube channel celebrity Seatin Man of Legends. It quickly spread.    On March 6th, the MCOC development team issued an official apology, said it heard the criticisms, and would issue a fix shortly. Note that on the day of the apology (fourth red line), MCOC broke below #20 first time in two years.

Here is a more detailed App Annie chart for the last year that shows MCOC fade starting in mid-2016:

MCOC Fade from Top 8-10 To Top 10-15

 

You might think that a slight fade from a consistent Top 8-10 revenue rank game to a Top 10-15 game is insignificant. But,  in the mobile game world, there is a strong power function relation between revenue dollars and revenue rank.  

At this high end of the mobile game power function a single digit swing in revenue rank translates into a $20 Million to $40 Million swing in ARR. Using our long-standing metric of 2.5 times ARR for valuing mobile game companies or studios + game engines, a one digit swing in rank translates into a $50 Million to $100 Million swing in valuation.

Below is our reconstruction of global annualized revenue of top ranking games currently on the iOS Apple app store charts as a function of rank. The iOS USA numbers are from Think Gaming,  which we believe are algorithmically derived and smoothed out rather than actual tallies.  Over the years, we have used this simple rule of thumb:

The global mobile game market can be divided into three equal segments: iOS USA,  Android USA,  and Rest of World.  Thus, global ARR = 3 * iOS USA.

 

Notice that the average ARR of Top 8-10 game is $242 Million whereas the average ARR of a Top 10-15 game is $156 Million, about $100 Million less in revenue and $250 Million less in value based on our 2.5 valuation multiple.

Obviously Kabam was acutely aware of MCOC’s fade and its implications for the value of the Vancouver studio. Also, Netmarble must of been aware when it turned its eye to Kabam after its June 2016 failed bid for Playtika.

Given the extent of the changes involved in Patch 12.0, the development team must have began work about two months after the start of the fade, say around August 2016. As Kabam and Netmarble were closing in on a deal, Kabam must have discussed Patch 12.0 with Netmarble including design choices based a trade-off between increases in average revenue per paying user (ARPPU) and the likelihood of player defection.

 Kabam may even have been savvy enough to prepare several versions of Patch 12.0 with different expected ARPPU  knowing that it would be Netmarble who would make the final decision once the deal closed. Normally, before a major update to a long running game, it is customary for a development team to do two things:

  1. invite key players to test the beta version and solicit feedback;
  2. present a detailed rationale for each change on official forums on the day of the release.

Netmarble did neither.  On March 1st, the final version of Patch 12.0 was released.

There was an immediate shock and outrage by hard core players as evidenced by their vents on YouTube, Facebook, Reddit, various game blogs, and official Kabam hosted forums. Among long running hard core games, the level and breadth of MCOC player outrage was unpresented.

 When we googled “player revolt” plus game name, we could find evidence only of one revolt by players of  MZ’s Game of War: Fire Age.   There have been no noticeable online revolts by players of Supercell’s hit games — Clash of Clans or Clash Royale — nor of players of MZ’s other hit game Mobile Strike.

Based on our reading of these criticisms, we believe that final version of Patch 12.0 was focused to the extreme on increasing ARPPU without giving much weight to player outrage and defection.

First, beyond the questions of objective, there was a major screw-up of core gameplay mechanics that made block and parry unplayable.  

Then, there was what we call widespread “devaluations” of player assets  designed to increase ARPPU.

 It included diminishing the fighting power (“nerfing”) of the most popular characters, or Champions, and providing incentives to buy unpopular Champions by increasing their power (“buffing”).  

Another devaluation occurred by making battle losses more costly in terms of power loss, thereby increasing regeneration costs. Finally, there was fundamental change in the scoring system with no rationale given.  But it appeared to the most experienced players that this change was designed to increase ARPPU.  

Player outrage and talk of organized revolt ended abruptly on March 6th when the company officially apologized and promised rollbacks which did occur with Patch 12.0.1 on March 10th.

In the end, Patch 12.0 and subsequent roll-back likely did nothing to reverse the fade of MCOC.  But it caused irreversible loss in trust by long term players.  Players can never again be sure that accumulated investments made in MCOC won’t be subject to another Patch 12.0 type devaluation. MCOC will never again be a consistent Top 8-10 game.  

Netmarble will likely hold off from making ANY major changes in the next six months to MCOC, leading to player ennui and defection to more engaging games.

Now on the the other instance where Netmarble’s greed led to decisions which caused a new game release by the Vancouver studio to be a bust. Kabam’s Vancouver studio was especially valuable to any acquirer because it had a proprietary  “game engine” called “Fuse & Sparx” thought to be capable of churning out a series of re-skinned MCOC hits.

First up was a game with MCOC-like game mechanics based on Transformers IP licensed from Hasbro called Transformers: Forged to Fight. (Transformers) Below is the countdown to the global launch of the game:

Notice that there was only a two month soft-launch before global release.  Based on App Annie charts, the game struggled in soft-launch and never cracked the Top #100 with any consistency.  

Normally,  a company would add a couple more months of tweaking before making a decision to launch officially or can the game.   Given Netmarble’s May 2017 IPO date, we think that they rushed released a deeply flawed Transformer game causing it irreparable damage as the early word was that it was buggy, slow to load, and freezes.

Even if the game’s bugs could be cleaned up, early players of the game reported that it is “too complex to play”  and there is “kitchen sink” approach to development with a mashup of game genres and a mind-numbing complexity to scorekeeping and purchasing.  

To us, this suggests that the priorities were early monetization over long term player engagement. Below is the revenue rank trend of the game:

 

Our four years of reading App Annie charts suggests that there are no more “late bloomers” in the mobile game world. If a newly released game does not crack the top 50 in the first few days, it will never crack the Top 10. The Transformer game is a major bust for Netmarble.

But worse, it raises doubts about the hit making ability of  Vancouver’s game engine “Fuse and Sparx.”  Could the success of MCOC be due more to the original team that developed it, long since gone,  and not its game engine nor the current team?

The bust of the Transformer game and the fiasco of MCOC Patch 12.0 raises serious doubts about Netmarble’s ability to manage future acquisitions in the West.  

Will Netmarble’s greed once again force newly acquired companies in the USA to release their own Patch 12.0?   

Will Netmarble’s greed force acquired companies in the USA to junk up games similar to what happened with Transformers: Forged to Fight?

Netmarble’s IPO will give the company  $2.4 Billion to make acquisitions of USA-based companies with current Top 20 hits.  This would include the privately-held companies Pocket Gems, Product Madness, and Jam City, a company already with a $100 Million Netmarble investment.

It would also include the publicly-held company Glu Mobile and the Com2uS, a company listed on the Korean exchange, but with most of its revenue coming from its global hit Summoners War.  

Unless Netmarble can change its focus to long term player engagement over short term monetization boosts, we think that they will destroy future acquisitions just like they destroyed Kabam’s Vancouver studio in two short months.

Glu Mobile Will Beat Guidance Based on App Store Data

Lawrence Abrams No Comments

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Article 0riginally published in Seeking Alpha on April 1, 2014

http://seekingalpha.com/article/2121433-glu-mobile-will-beat-guidance-based-on-app-store-data

First quarter 2014 has just closed as I write this article about GLU Mobile (GLUU), a pure play mobile gaming company. With access to daily app store revenue rankings for the past 3 months, I believe that GLU’s revenue will exceed guidance a full month ahead of its 10-Q release and conference call scheduled for April 28, 2014. However, it won’t be a blowout like last quarter.

Freely available app store data represents a new step up in the democratization of investor data. It builds on the strides made by internet access to real time stock prices, live conference calls (albeit with scripted questioning by Wall Street analysts), and live blogging of major new tech releases. It is part of the same trend toward equal access to investor data that famed Fidelity fund manager Peter Lynch wrote about after realizing that any shopper could see the disruptiveness of L’eggs hosiery sold through grocery stores in the early 1970s.

Had I been following app store data 3 months ago, I could have made a killing buying GLU before it announced 4Q 2013 results on February 6, 2014. On that day, the company disclosed a 60% Q/Q revenue explosion due to the successful release of Deer Hunter 2014. The share price shot up from $3.87 to $4.94 for a one day gain of 28%.

I know, “shoulda, woulda, coulda.” But let me walk you through the charts of GLU ex post to pique your interest before proceeding on to an ex anteanalysis of the chart of GLU’s franchise game, Deer Hunter 2014 (DH14), plus the charts of FIVE new releases: Eternity Warrior 3, RoboCop ™, Motocross Meltdown, Front Line Commando 2, and Pirates of Everseas.

I present first a spreadsheet of trailing 4 quarters of revenue for 3 of the most followed publicly held pure play mobile gaming stocks listed on US stock exchanges.

Glue Sales Trend

New mobile game releases can create a 50% or move Q/Q revenue pop like Deer Hunter 2014 for GLU and the Saga series for King Digital Entertainment (KING). But, my reading of data derived from app stores suggests that even mega-hits like Candy Crush Saga plateau and fade after 3 quarters. You will get killed playing these stocks if you rely only on 10-Qs or interim sale data released by Wall Street analysts at their convenience.

Fortunately, there are several data analytics companies that track daily app store downloads and in-app purchases of mobile gaming companies. We have a limited access, free account at App Annie. (Disclosure: I have not received any remuneration from App Annie.) Another sources is Distimo.

With a free account, you cannot download any data. But you can take screenshots of graphs of daily rankings (1-1000) of mobile games by revenue, where revenue is the sum of download revenue + in-app purchases. These graphs can be filtered by app store – Apple Store, Google Play, and Amazon – by mobile game type, and by country. App store data does not include revenue from advertising. But most mobile games these days are free-to-play with monetization via in-app purchases.

Below is a graph of GLU’s stock price, showing the 28% pop on February 6, 2014 based on a 60% Q/Q revenue growth for 4Q 2013.

GLU Stock
Source: Reuters

The chart above was foreshadowed by App Annie data. On September 18, 2013, GLU released Dear Hunter 2014 (DH14). It immediately shot up to an App Annie Top 10 revenue ranking and remained there during October and November. During December, the game slowly slipped down to a Top 15 ranking.

Deer Hunter 4Q

A more granular view of the above:

deer hunter Oct-Dec 2013

As a space saver, we show only App Annie data derived from the U.S. Apple Store, believing that this sample is reflective for GLU games as a whole. For other games with a significant following in Asia, data derived from Google Play store should be included, as Android is the primary smartphone OS there.

In hindsight, I know now that a Top 15 game was unprecedented for GLU. Based on recent disclosures by KING and GLU, I now have a rough map of App Annie revenue ranking to quarterly $ revenue.

Map of Q Final

The long-tail of this graph will come into play when analyzing GLU game revenue ranking charts for 1Q2014. In sum, the data above signaled a month before GLU’s 10-Q release in February 2014 that DH14 was a hit and that GLU would blow through guidance.

Now we turn to an ex ante analysis of whether GLU will beat revenue guidance for 1Q. Here is the guidance from an SA transcript of GLU’s 4Q conference call on February 5, 2014:

“Turning to the first quarter of 2014, we currently expect our total non-GAAP revenues to be in the range of $38 million to $40 million, an increase of 54% to 62% compared to the first quarter of last year and slightly down compared to Q4. This guidance assumes Deer Hunter 2014 to contribute approximately one-third of total non-GAAP revenues during the quarter. We are also seeing solid initial traction from EW3, RoboCop and Motocross Meltdown, which will lead to broader revenue diversity in Q1 as compared to Q4.”

In sum, GLU’s guidance is for a slight down Q/Q. Based on the charts below, I believe that GLU will have an up Q/Q in the 10% range, enough to push the stock up from its current depressed level. But, none of the new releases came close to the Top 15 hit of DH14.

GLU Launch Dates

First, we present the revenue ranking chart of DH14 for 1Q. The “half empty” view is that DH14’s revenue continued to slide from a Top 15 game to a nadir ranking of 31 on January 31st. The “half full” view was that GLU made two important release updates that reversed the slide and DH14 ended the quarter at 13.

Deer Hunter 1Q

On January 31st, version 1.2.2 was released boosting revenue ranking from 31 to 14 in a day. On March 18th, version 2.0.0 was released again boosting revenue ranking from 40 to 13 in a day. I don’t see this reversal pattern in charts of games put out by other companies. The usual game revenue pattern is up, plateau, then steady decline. I believe the above chart is a reflection of GLU’s ability to manage a game post-release and to make frequent updates that boost in-app revenue.

Also, not too much should be made in revenue ranking swings of games ranked below 15. There is a long tail relation between revenue ranking and $ revenue – see the graph above again. Ten point ranking swings below 15 are associated with modest $ revenue swings.

We are still in the very early stages – with only 4 actual data points – of fleshing this relation out, but roughly, we estimate that a 5 point drop in DH14’s ranking over the course of 1Q resulted in a quarterly revenue drop in the $5M range. The science of mapping app store rankings to $ revenue is evolving rapidly. We have found another attempt made by Think Gaming based on estimates of daily active users multiplied by estimates of average revenue per user.

Based on comments of an earlier article of mine on SA, I want clarify what I mean by a Top 10 or Top 15 rank on “the charts.” My rankings come from App Annie, not directly from Apple Store charts. There have been a number ofarticles published lately warning about “gaming” the Apple Store charts by using bots to create download spikes. There is even a report of a developer spending thousands of dollars to spike in-app revenue of his game. In response, Apple (AAPL) has altered its chart algorithm to reduce fraud.

So with these caveats in mind, the question becomes, can the release of FIVE new GLU games in 1Q overcome DH14’s decline? Here are the charts and insight a full month before the 10-Q comes out. First up was Eternity Warrior 3 released on December 31, 2013. The game barely cracked the top 100 initially and has faded since then.

EW3

Next up was RoboCop™ released on January 7th. It got as high as 89 on January 16th, but has faded. While affixing a hit movie name to a game generates downloads, it is quality that generates revenue. The RoboCop™ chart is a warning to GLU as it moves forward with releases of other branded games.

RoboCop

Next up was Motocross Meltdown released on January 21th. It never cracked the Top 100.

MC meltdown

Next was Front Line Commando 2 released on March 5th. This was probably GLU’s biggest hope for a hit as it is a franchise game with some name recognition. The game was the best of the 1Q lot, but never cracked the Top 50. An update is warranted here.

FLC2

Last was Pirates of Everseas released just two weeks ago on March 18th. It never cracked the Top 200.

PE

While there are no new releases that have come close to DH14’s success, GLU has demonstrated clearly that it can deliver a number of new games on time. We believe that the sum total revenue from five new releases was sufficient to offset a decline from DH14. GLU will beat its 1Q revenue guidance, but not by much.
Obviously, there is room for improvement here. The positive take-away from 1Q is that GLU has proven that it can deliver a slew of new games on or before the date promised. Not many gaming companies have proven that. With its engagement management platform, GluOn, now in place, it has the capability of boosting revenue of games post-release.

“Flappy Bird” Investing Requires Daily App Store Tracking

Lawrence Abrams No Comments

By Larry Abrams, published by Seeking Alpha 3/24/13

http://seekingalpha.com/article/2106973-flappy-bird-investing-requires-daily-app-store-data

Investing in publicly-held mobile gaming companies like KING, ZNGA, GLUU, and a host of other companies around the world, is the purest play ever on the hit-making business. It is momentum investing on steroids. Investors, 99% of which have never played a mobile game in their life, have been drawn to the industry lately by press reports of the success of “Flappy Bird” and of “Candy Crush Saga.”

The magnitude of success of “Flappy Bird” first came to light in a month ago in an interview in The Verge. Dong Nguyen, the game’s sole creator, revealed that, while the free-to-play game was earning an average of $50,000 a day from advertising. It was truly amazing that a single person could produce a piece of software, upload it to an app store, and receive 50 million downloads within months of release solely on the basis of social media chat.

Another example comes from a Wall Street Journal article on the upcoming IPO of King Digital Entertainment (KING), the creator of the smash hit “Candy Crush Saga”,

“In its filings with the U.S. Securities and Exchange Commission on Tuesday, the game developer said it saw a more thantenfold revenue increase in 2013, as sales skyrocketed to $1.88 billion from $164 million in 2012… King said its net profit last year was $568 million, up from $7.8 million.

The speed of success of mobile games suggests that you can’t wait for quarterly 10-Qs and conference calls to give you buy and sell indicators. Revenue streams can explode in a matter in days not months. But, it is no sure thing that a quick rise to the top of an app store bestseller list is sustainable. Again, you need to follow sales weekly at least.

And even if a game is so addicting that players keep paying for add-in purchases for months, it’s not heroin. Game addiction eventually wears off. And you will get killed if you wait for some CEO in a conference call to give you the bad news.

To invest with success here, you need something equivalent to weekend box office figures followed closely by investors in pure play movie studios like Lions Gate (LGF) during the release of movies with blockbuster potential.

Fortunately, there are several data analytics companies that we are aware of which track daily app store downloads and in-app purchases of mobile gaming companies. We have a limited access, free account at App Annie. (Disclosure: I have not, or will not ever, receive monetary remuneration from App Annie.)

With a free account, you cannot download any data. But, you can take screenshots of graphs of daily rankings (1-1000) of mobile games by revenue where revenue is the sum of download revenue + in-app purchases. These graphs can be filtered by app store – Apple Store, Google Play, and Amazon – by mobile game type, and by country.

App store data does not include revenue from advertising. But, mobile gaming companies, led by the Japanese, seem to be headed toward a free-to-play business model with monetization via in-app purchases of addicted players.

What follows is a sample pairing of time series app store data alongside daily stock prices of a “franchise game” of a pure play mobile game company over a period of months. It will give you an ex-post view of how daily app store data might have been used to signal a buy or sell ahead of the next 10-Q.

The example is COLOPL’s franchise game, “Quiz RPG: The World of Mystic Wiz.” COLOPL went public in December 2012 and the stock languished until Quiz RPG was launched in late April of 2013. Upon release, the game quickly rose to #5 on the Apple Store-Japan revenue list and has stayed in the Top 20 since. At launch, COLOPL’s stock was at 479¥/share. The stock peaked on January 20th at 4,110¥/share, a 9-bagger in 9 months.

Rather than wait until a July or August conference call when the CEO mentions the potential of Quiz RPG, you could have tracked the game’s app store data enough to convince you go all at around 1,000¥/ share in June.

This is daily sales data that you can get firsthand. You are not dependent on when some Wall Street analyst chooses to release interim sales data – good or bad — from a polling of customers.

colopl

 

 

stock colopl

Price-Sales Ratios of Mobile Gaming Companies

Lawrence Abrams No Comments

Published by Seeking Alpha 3-20-14

http://seekingalpha.com/article/2100903-price-sales-ratios-of-mobile-gaming-companies

Investing in publicly-held mobile gaming companies is the purest play ever on the hit-making business. It is momentum investing on steroids. To paraphrase the Sean Parker character played by Justin Timberlake in the movie The Social Network, “A doubling of sales isn’t cool. You know what’s cool? A tenfold increase is cool.”

As an example of the new cool, consider the following numbers from a Wall Street Journal article on the upcoming IPO of King Digital Entertainment (KING), the creator of the smash hit “Candy Crush Saga”,

“In its filings with the U.S. Securities and Exchange Commission on Tuesday, the game developer said it saw a more than tenfold revenue increase in 2013, as sales skyrocketed to $1.88 billion from $164 million in 2012… King said its net profit last year was $568 million, up from $7.8 million.

Jim Cramer thinks KING is cool, saying it is a better value now that Zynga (ZNGA), given the IPO’s price-earnings (P/E) ratio of 13 and a trailing twelve month price-sales (P/S) ratio of 3.7, both of which are better than ZNGA.

But, when it comes to momentum investing, trailing P/E and P/S ratios fail to capture growth potential and value. With traditional momentum investing, forward ratios are developed by projecting metrics forward, often linearly, from results of the past 3 to 8 quarters. But, coming up with a good forward ratio is problematic for mobile gaming companies where growth is hyperbolic, but can stop on a dime.

PriceSales vs Growth

Investing in publicly-held mobile gaming companies is the purest play ever on the hit-making business. It is momentum investing on steroids.

Ignoring the possibility of stagnation, Pamela Peerce-Landers published an article in SA last week which did project out KING’s financials a few years based on the full 2013 results. The result was that Pierce-Landers values KING between $128 and $142 a share.

Multi-year projections like this based on full year results might be fine for momentum companies with moats like IP, network effects, brands, etc. But is this kind of projections valid for mobile gaming companies?  In her article, Pierce-Landers makes the argument that KING has a “formula” or “platform” that can replicate hits.  We shall see.

What follows is an analysis representing a middle ground between trailing ratios and forward ratios based on full year results.  Basically, we are saying that with mobile gaming companies, you can only look at one quarter back and one quarter forward.

What follows in an analysis of P/S ratios of 6 publicly-held mobile gaming companies plus pre-IPO KING. We also calculate
the latest quarterly sequential sales growth rate and map this against trailing P/S as a reasonable projector for companies whose growth can, and have, stopped on a dime

Several things are notable for us: (1) the sudden stagnation of KING in the latest quarter after 2 previous quarters of 50% plus sequential growth; (2) the breakout of GLUU in its latest quarter after 2 previous quarters of stagnation; (3) the lack of visibility still for a ZNGA turnaround; and (4) last, but not least, the amazing, unabated growth of the Colopl which makes KING’s growth seem pedestrian by comparison.

Next we calculate the P/S ratios for these 7 companies and plot P/S ratios against last quarter’s sequential growth rates.

The analysis suggests a positive correlation between P/S ratios and the latest quarter’s sequential growth rate.
PriceSales vs Growth

Graph

You cannot say that a company is overvalued or undervalued based solely on its trailing P/S ratio. You must look at both P/S ratios and recent sales growth figures. You cannot say that companies like DeNA or GREE are undervalued just because their P/S ratios are less than 2 because their sales are in decline.

Similarly, you cannot say that Colopl is overvalued with a P/S ratio of 13 because its sales have been growing at 50% plus sequentially for not one quarter, but three quarters. Indeed, even with a P/S of 13, we think that Colopl is undervalued.

In the case of KING vs ZNGA, our analysis supports Jim Cramer’s assessment that KING is a better play than ZNGA. But, GLUU bests both as it has about the same P/S ratio, but sports a breakout quarter of 60% sequential sales growth rate.