If you haven’t heard of Glu Mobile (GLUU), then take a close look at the nearest smartphone. GLUU has recently scored some big hits in the mobile gaming space with titles like “Kim Kardashian: Hollywood,” “Dino Dash,” “Deer Hunter,” and “Contract Killer.”
GLUU bulls were singing the company’s praises as this stock ran as high as $7.47/share in July. However, our research showed that behind the headlines, there was little to justify Glu’s valuation. We saw that the stock was primed for a fall.
We put GLUU in the Danger Zone back in August. At the time, GLUU was valued at ~$5.40.
In spite of the hype surrounding the stock and its revenue machine “Kim Kardashian: Hollywood,” our cash flow analysis showed that the company’s valuation was unsustainable. Since our call in our investment research, GLUU has plummeted 38%. To justify its then-valuation of ~$5/share, GLUU needed to achieve pre-tax margins of 20% (current margins are -19%) within five years and grow revenue by 25% compounded annually for the next 11 years.
The Right Call in Our Investment Research
After reporting 3Q14 earnings, we saw the same problems with Glu Mobile in our investment research. A huge increase in revenue was offset by a larger increase in expenses, due to the growing cost of making and marketing new content. Negative pre-tax margins continued to plague Glu as well. The market saw these problems as well, and the stock tanked 20% in a single day.
All in all, New Constructs members who sold GLUU the day after our report came out would have saved themselves a loss of over 38%.
Dangerous stocks like GLUU are capable of wiping out an entire year of positive returns and can quickly send your portfolio into underperformance. New Constructs’ patented system for reversing accounting distortions performs the due diligence for you on over 3000 stocks, so that you can avoid pitfalls in the headlines like GLUU.
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Sam Andrews contributed to this report
Disclosure: David Trainer and Sam Andrews receive no compensation to write about any specific stock, sector or theme.