Glued to the Sweet Spot of Mobile Gaming

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Glu Mobile (NAS: GLUU) is sitting in the sweet spot of video game development. With a focus on mobile gaming and a generous helping of quick-play casual games, Glu panders to two of the three hottest trends in video games today. Turn up the social networking factor to 11, and you'd be looking at a game developer fully in class with Facebook-based phenomenon Zynga.

So it's hardly surprising to see Glu shares shooting up by 270% over the last year and more than doubling year-to-date. Even better, the company just reported second-quarter earnings that didn't send investors running for the hills. In fact, the fact share prices hardly moved at all yesterday underscored the value analysts and shareholders see in Glu's strategy.

Mind you, we're still looking at a minnow in the big sea here. In the second quarter, Glu recorded 12% non-GAAP revenue growth at $17.9 million. Non-GAAP adjustments exclude changes in deferred revenue, meaning it gives a better view of the up-front sales the company collects. Better yet, smartphone game sales also exceeded feature-phone game revenues for the first time in Glu's history, showing that the company is on top of the smartphone trend.

Glu recorded a GAAP net loss of $0.03 per share, which is better than last year's $0.10 loss per share. Analysts expected slightly worse negative earnings and lower sales.

The company also announced the acquisition of two even smaller mobile game developers and the launch of a proven favorite in the Google (NAS: GOOG) Chrome web store. These guys are getting around.

Glu's share price has dwindled by some 30% from recent 52-week highs as Google and others have started to encroach in Glu's traditional stronghold markets. Everybody's doing it, in fact: Electronic Arts (NAS: ERTS) and Activision Blizzard (NAS: ATVI) pride themselves on active development in the mobile gaming space, the NintendoDS line of handheld systems has always fought for a very similar demographic, and smaller studios such as Majesco Entertainment (NAS: COOL) are making names for themselves with smartphone-friendly games.

And the sector is ablaze with buyout activity, too. Only last month, EA plunked down up to $1.3 billion to acquire Plants vs. Zombies developer PopCap Games. Gaming retailer GameStop (NYS: GME) made a smaller investment in Flash-based gaming site Kongregate last year, just as Walt Disney (NYS: DIS) paid over half a billion for social-gaming specialist Playdom. With a market cap just south of $230 million, Glu looks downright affordable even while trading at 3.5 times trailing sales and 210 times forward earnings.

I could go on, by my point is that small game developers with a mobile or social focus are hot properties these days -- and Glu could very well be the next name on the buyout roll. Blink and you'll miss it, unless you're keeping an eye peeled on the stock at all times. Adding Glu Mobile to your Foolish watchlist helps you do exactly that. Just click here to get started.

At the time this article was published Fool contributor Anders Bylund owns shares of Google, but he holds no other position in any company mentioned. The Motley Fool owns shares of and has written calls on Activision Blizzard, and owns shares of Google and GameStop. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Nintendo, Walt Disney, and Google. We have also recommended writing covered calls on GameStop and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.

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