Is It "Game Over" for Zynga and Glu Mobile?

Is It "Game Over" for Zynga and Glu Mobile?

Zynga and Glu Mobile develop games that are played on the web, smartphones, and tablets. In recent years, such companies have thrived, but with two new game consoles from Microsoft and Sony to hit the market should investors be concerned?

Seven years of mobile
In 2007 Apple took the mobile-phone industry by storm when it released the first generation iPhone. Since then, Apple has updated that original version several times over.

But for the sake of argument, let's say that Apple had never updated its iPhone product-line, and that we did not have the 4, 4s, 5, etc. If so, conventional wisdom suggests that Android would own an even larger piece of the smartphone pie, iPhone sales would've lagged in recent years, and who knows, BlackBerry might still be relevant.

Now, with the iPhone example in mind, consider the fact that neither Sony nor Microsoft has released a new PlayStation or Xbox in seven years! In a technology industry that innovates daily, consumers continue to play games, but many who seek new games and a new platform have transitioned to mobile gaming.

As a result, companies such as Glu Mobile and Zynga have thrived. Glu Mobile's stock has soared more than 1,400% in the last five years and Zynga's annual revenue has increased from under $100 million to over $1 billion in the same period.

Both companies offer an array of mobile games, but it has been success from Glu's Deer Hunter and Zynga's Farmville and casino games that have catapulted the companies to being relevant in the gaming space. But also helping is the seven years that both companies have enjoyed without new console refreshes.

Strong initial sales are expected to get stronger
While Zynga and Glu Mobile might continue to perform well, very few are showing concern that two high-profile blockbuster game-consoles have released in the last few weeks.

Sony released its PlayStation 4 (PS4) last weekend and sold a whopping one million units in just 24 hours . The website broke-down the PS4 to find a total component cost of $332; the system sells for $399. Hence, in just 24 hours, Sony created nearly $400 million (minus retail mark-up).

While Sony's margins on PS4 sales are unlikely 16.7% due to retail mark-up, strong sales are still likely to boost the company's operating margin, currently just 0.5%. Therefore, Sony might be an interesting investment opportunity.

Moreover, GameStop announced on Thursday, Nov. 21, that 2.3 million consumers are waiting to purchase new consoles . Keep in mind, this is not counting the 1 million PS4 units already sold, which implies strong sales of Xbox One as well.

In fact, AllThingsD is already reporting that first-day sales of Xbox One topped 1 million , implying equally impressive demand. However, Microsoft investors haven't shown too much excitement regarding Xbox One, as many project it to be a distraction from the fast-growing cloud computing space.

Moreover, Xbox One is costly: Nomura analyst Rick Sherlund is expecting Microsoft to lose at least $1 billion as a result of the Xbox One, due to hardware, infrastructure, ecosystem, and inventory expenses . However, Microsoft's VP of strategy, Yusuf Mehdi, estimates the gaming industry will grow from $66 billion to $78 billion in 2017, and Microsoft wants to profit from this growth.

Hence, Xbox One might cost Microsoft short-term, but could be a long-term blessing.

Where's the correlation?
In case you don't see the correlation, Microsoft and Sony's new game-consoles are blockbusters, and both Zynga and Glu Mobile have a lot to lose.

If consumers are buying new consoles it means they are also buying new games, and likely spending less time on mobile games. In technology, consumers are drawn to the newest and most innovating devices, and right now, both Zynga and Glu Mobile are yesterday's news.

In retrospect, if Glu Mobile or Zynga were trading with large losses in anticipation of the new console releases then the downside risk would be far less. However, both stocks have traded with gains of more than 50% in the last three months, almost completely ignoring the immense competition to hit the market.

Therefore, investors should keep this thought in the back of their minds before investing in either Glu Mobile or Zynga. They should consider these facts as part of their due diligence and then determine whether or not the release of these two consoles will have any effect on either company's fundamentals.

With that said, the launch of Xbox One and PS4 is unlikely to be game-over for Zynga or Glu Mobile, but it does pose a challenge, which is likely far more significant than the market realizes.

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