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30 Jun

GLUU: Up Big! As Expected – Now What?

by

With shares of Glu Mobile Inc. (GLUU) up huge again today – and up 24% from our most recent alert – Wall Street is catching on to the gravity of the most recent developments at the company.

Though a little late to the punch for our clients, advisory firm Benchmark announced it raised its rating of GLUU to a “buy” from a “hold,” setting a target price of $5.60 – a target price, of which, is approximately 52% higher from the Jason Bond Picks Alert we issued on May 15.

Glu Mobile is a maker of mobile games, a space we’ve covered for more than two years due to its whopping upside potential of 27.3% compound annual growth rate (CAGR0 throughout the next few yeas.  Apparently, Benchmark came to the same conclusion we did.  Benchmark likes the growth potential of the sector and growth prospects of Glu’s stable of popular games, and stated in its new release  that Glu is poised to benefit from the “rapidly expanding” smartphone and tablet market.

But sometime a smaller Wall Street observer gets there first.

“No doubt, Glu’s business model works.  The company is broadening its titles and making appropriate acquisitions.” Jason stated in our May 15 post, titled, KING, ZNGA & GLUU: Which One Best For Investors?  “It has $54.4 million in current assets, apparently good management and no debt.”

“Glu, though it trades at a rich multiple to projected earnings, the company has all the makings of a takeover candidate,” Jason concluded.  “Since the mobile gaming market offers a high gross margin and an eye-popping market growth profile, Glu’s continued excellent performance could be attractive as a means of a much larger suitor grabbing market share.”

What we like about Glu is its breadth of games.  In this sector, investors should realize that the barrier of entry is quite low.  Any one of the big three, King Digital Entertainment (KING), Zynga (ZNGA) and Glu Mobile (GLUU) could stumble rather quickly if the demand for a SINGLE big money-making game suddenly turns for the worse.  We saw that already in Znga’s fall from grace in early 2012, and King’s lousy IPO this year.

And what was the complaint with King’s IPO?  King suffers from the One-Hit Wonder Syndrome.  In 2012, Znga analysts said the very same thing: Znga is gambling as a ‘One-Hit Wonder’.

But Glu is a different play altogether; its’ depth of games include big hits, Deer Hunter and Eternity Warriors, which lead an impressive lineup of other smaller cash cows in Glu’s bullpen, including Contract Killer 3, Hercules, Tap Sports: Baseball.  Now add in Glu’s acquisition of PlayFirst’s revenue stream from its hits, Diner Dash, Cooking Dash, Wedding Dash, and Hotel Dash, and Wall Street suddenly takes a shining to what it perceives as a much steadier revenue stream in a sector fraught with wild quarterly misses and beats.

Hedge fund and institutional money managers love predictable revenue streams.  Of the ‘three bigs’, Glu has demonstrating that, not only does the company grasp the concept that hitting just ‘home runs’ won’t satisfy investors and critics of analysts paraded on CNBC, the company must demonstrate it can hit lots and lots of singles and double to win at earnings an investors’ hearts.

At a market cap of a lofty $380 million, Glu is running steep and hard by capitalizing on its strong business model.  The stock has run fast – very fast – in the last few trading days.  And many traders have taken notice to Glu’s relatively large short position, too, as more and more trades expected to secure some profit-taking on an overbought market condition of last week.

But alas, this latest explosive rally of 25% (or a 1,355% CAGR) included many shorts who don’t understand that the company is much more likely to surprise to the upside than surprise to the downside.  That seemingly tiny and innocuous indiscretion certainly wasn’t lost in our analysis of GLUU.  As many focus too much on Znga’s turnaround and King’s IPO, little Glu has been making us money on the misconception that Glu suffers from the same risks that investors of Znga and King suffer from.

Volume in GLUU is way up, more than five (5) times the stock’s average.  And shorts as a percentage of total trading volume is declining.  So now what?

Analysis

Glu’s pop has been expected, but the move has reached nosebleed levels.  Jason Bond Picks expects profit-taking to commence very soon.  The day traders who were caught flatfooted on the short side have already covered their shorts.  As the price retreats from the exhausted short-sighted bears, then momentum will most likely turn to profit-taking.

At a high of $4.87 during Friday’s trade, we see the profit-taking already coming in.  As of 3:25 p.m., GLUU trades at $3.72, off 15 cents from the high.

Remain alert and nibble during the most recent monster rally in GLUU.  Better prices may be on the way after this rally has been squeezed ever short it can.

Looking for another big move from a short squeeze?

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Click here for 2013 Performance Record.

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