Benchmark Downgrades Glu Mobile, Says It Could Be A Compelling Takeover Target

• Benchmark has downgraded Glu Mobile Inc. GLUU after the company reduced its Q4 guidance.
• Benchmark believes that the stock offers a compelling valuation but sees an unclear growth outlook.
• However, Glu's valuation makes it a compelling buyout target.

Benchmark analyst Mike Hickey has downgraded Glu Mobile following the company’s disappointing Q3 earnings report. Glu reduced its Q4 guidance, and Benchmark fails to see a compelling growth story for the company in 2016.

The Numbers

Despite Q3 sales of $64 million coming in ahead of the Street's expectations of $59 million, Glu lowered its Q4 sales guidance significantly. The new projected Q4 sales are $50-$52 million, down from the original guidance of $89-$102 million.

Glu also guided for 2016 sales of only $275 million, well short of the Street's $334 million projection.

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Valuation

Hickey believes that Glu's increasingly attractive valuation could make the company a compelling takeover target.

"We view the company's risk/reward valuation profile…benefiting from a reasonably strong track record for creating and sustaining hit games, mobile game market growth, planned release of 4 celebrity games, strong balance sheet, an on-going valuation reset and compelling strategic partnerships with Hollywood, Celebrities and Tencent," he explained.

Where's The Growth?

In addition to the disappointing guidance, Benchmark sees other indicators that Glu is uncertain about its growth profile in 2016 and beyond.

Hickey believes the company’s decision not to buy back stock as an indication that Glu will be looking to drive growth via acquisition rather than rely on its core business. He predicts a cost restructuring on the way in early 2016, and feels that the company’s cash balance “should deteriorate near term."

Benchmark downgraded Glu from Buy to Hold and has a $3.69 target for the stock.

Disclosure: the author holds no position in the stocks mentioned.