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Mobile Game Leaders May Be Starting to Surface

19 November 2014 in Trading Ideas

Is it game over in mobile?

A recent note by Cowen analyst Doug Creutz has declared King Digital and Glu Mobile as the current leaders of the pack – and a pair that may not abdicate their supremacy.

Creutz pointed out that since September 2013, only eight games have launched that have spent at least three months among the top 20 grossing US games for Apple’s iPhone. Half of those best-selling games have been from King or Glu. King produced “Farm Heroes Saga” and “Bubble Witch 2 Saga,” while Glu came out with “Deer Hunter 2014″ and “Kim Kardashian: Hollywood.”

“We think these successes are representative of the better game development, marketing and support that King and Glu are able to deliver relative to their peers,” Creutz wrote, adding that October sales data point to King and Glu as clear leaders in the mobile games space.

Last month, King held one-quarter of the top 20 games on the iPhone and the Google Play download store, with five on each. Plus, King overtook privately held Supercell, maker of “Clash of Clans,” for the No. 1 gaming spot on Apple’s iPad tablet.

King’s puzzle adventure game “Diamond Digger,” released on Sept. 3, entered the top 20 on the iPhone (No. 20) and Google Play (No. 11) in the US in October.

Last week, King launched “Candy Crush Soda Saga,” the latest in its candy-themed puzzle game series.

“We believe the space will consolidate as rising customer acquisition costs heighten barriers to entry; the winners will likely be companies with differentiated product portfolios,” Creutz’s note said. “Glu and King currently remain our top two investment ideas.”

While the recent success has been a boon for shares of King, Glu’s stock has fallen on hard times. Overall, however, the sector has recently performed well for investors.

The Online Gaming World motif has gained 14.9% over the past month. During that time frame, the S&P 500 has risen 8.4%. In 2014, the motif is up 27.4%; the S&P 500 has increased 12.4%.

Ironically perhaps, part of the reason for the sector’s good health has been due to the mobile performances – and real profit – turned in by the big gaming companies that were supposedly going to shrivel amid upstart competition. Take Electronic Arts, for example, which has seen its stock gain more than 24% in the past month, largely on the strength of its most recently reported quarter. (EA’s stock has a 21.4% weighting in the Online Gaming World motif).

EA’s revenue jumped to $990 million last quarter, and its “net revenue” figure beat expectations by $196 million. In addition, as investor John McKenna noted in a recent Seeking Alpha post, as impressive as the top line was, the numbers were heightened by the strength of mobile and digital sales that EA had been investing in for the last few years.

Digital purchases increased by 6%, mobile sales jumped by 11%, and in-console purchases rose by a whopping 95% year-over-year thanks to the successful FIFA Ultimate Team that took advantage of the Xbox One’s EA Access community. McKenna pointed out that the digital and mobile purchases largely came from in-game upgrades from the various titles that were released, which he said demonstrates EA’s success in monetizing user interactions after a game has been purchased.

Eventually, investors may choose between companies that generate big profits and companies that will continue to produce hit games. For now, however, both appear to be popular.

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