SoundView Capital

Interesting Mobile Payments Tidbits from ChangeWave

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We’ve been working quite a bit in the secure payments area so the recent ChangeWave survey results around Apple Pay grabbed our attention. As we suspected Apple Pay is a game changer in a massive industry. You might find yourself nodding away at the points and pictures below but pinch yourself – this is a big deal. Mobile devices will be taking over a significant portion of payments rapidly – finally moving this market into commercial status and putting acute pressure on device makers and software platforms like Android to catch up. We also expect the market for non-phone-based smart wallet technology to be lifted by the acceptance of Apple Pay as well.

We’ll keep it down to simple bullets and pictures:

1. PayPal should be very worried about Apple Pay. Look at how the two reversed position in terms of consumer preferences in just three months!  That’s huge.

Apple v PayPal for consumer payments
Apple kicks PayPal in the gut.

 

2. Apple has squarely addressed the two major obstacles to increasing adoption of mobile payments.

 

Screenshot 2014-10-22 16.27.13

3. 28% of consumers reported that it was “likely” or “very likely” that they would use Apple Pay and these are the top areas cited for use. The strength of the “dining out” option is higher than we would have expected. It makes the payment plan by Open Table (prior to the PCLN acquisition) seem more sensible although it’s now probably DOA thanks to Apple Pay.

Screenshot 2014-10-22 16.33.51

 

4. Although this is a major turning point there’s still work to do and plenty of opportunity. Security is still a big issue for the majority of consumers and it should be remembered that only a small minority of people will be carrying an iPhone 6 or better for a while.

Screenshot 2014-10-22 16.37.50

 

In summary this is an expected but very strong set of results for Apple Pay in particular and we think further for increased adoption of digital payments. Smart wallets, smart watches and other personal technologies will all integrate with a new digital payment infrastructure.

(We strongly recommend ChangeWave for investors and companies looking into emerging technology trends. Shoot us an email and we’ll be happy to point you to the right person there to set up a subscription. )

[Specific disclosures related to this post – Long position in AAPL, long position in MOLG, advisor to NXTD, actively seeking other advisory work and/or investments in mobile payments.]

Glu Mobile (GLUU) ER Marks Real Progress in Mobile Gaming

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Summary Points:

  • Glu Mobile (GLUU) reported a strong March quarter with $47M in sales (up 90% YoY) which beat consensus by $10M.
  • Guidance for the full year 2014 has been increased to between $155M and $161M but remains conservative based on commentary.
  • Acquisition of PlayFirst for about $15M adds what should be a new $10-15M+ franchise at an attractive valuation. Location and culture should also fit.
  • With a market capitalization of $325M the shares of GLUU are still at an early stage of recognition that their growing platform approach to mobile games is working.

Mobile gaming is stunningly large. It would have been great to invest in King Digital (KING) two years ago when revenues were just $100M. Now standing at $2B in revenue with a $5.4B market capitalization not so much.
But our attention was drawn to Glu Mobile (GLUU) which is focused on the same space but much smaller. Arguably Glu now has a better revenue mix and lower-risk strategy then King. Glu now has three successful games comprising the bulk of revenue rather than just one.
The stock had performed well up until the less-than-spectacular KING IPO and subsequent sharp decline in most technology and internet stocks. The “round trip” from $4 to $6 and then back to $4 on a KING IPO yawn was market noise. In the absence of the KING hype the shares of GLUU would probably have simply continued their measured rise to the $5 range.

This earnings report and commentary should set the stock up to move back to being valued on what are improving fundamentals.  We can break down the new information from the call into the following pluses and minuses:

  • Results for March were excellent. They showed a “fatter tail” to leading games like Deer Hunter and Eternity Warriors. Suggests that long-term growth will continue to improve.
  • Acquisition PlayFirst adds a franchise that generated $11M in revenues in 2013 but in decline. However a refresh and release of a known game (750M downloads) will get revenues growing again from their current run rate of $7M. The purchase price should be very accretive. 
  • New releases like Dino Hunter and new projects announced for a James Bond game and tapping the mobile market in Japan are promising. 
  • Q2 ending June will be the “nadir” of the year given the current release schedule and declines in existing games. Probably conservative guidance but it should also dampen some short-term investor enthusiasm to go out and buy the stock now. 
  • A shelf registration generates uncertainty about further acquisitions and/or dilution from additional external capital. The PlayFirst acquisition terms demonstrate management acumen but the track record isn’t yet well established.

Conclusion

For long-term investors the current risk/reward of GLUU shares looks favorable. The company has upgraded management and is taking a thoughtful and responsible approach to developing games and the company. There are other ways to play the space like KING or older companies like Electronic Arts (EA) and Activision Blizzard (ATVI) but these all already have market values from $5B to $14B.

Disclosure: We own shares of GLUU at the time of this writing. It’s been in the portfolio for some time now and we expect to be holding it for at least another year as long as fundamentals remain consistent with our expectations. As a reminder please see our important terms, conditions and disclosures.