EA, Zynga Inc (ZNGA): This Just In: Upgrades and Downgrades

Glu Mobile Inc. (NASDAQ:GLUU)
Finally, and in the only good news of the week, Northland Securities announced Monday that it’s raised its price target on mobile gamer Glu to $4.50, nearly doubling its previous prediction of $2.50 a share. Needless to say, with Glu shares currently costing only $3.16, Northland thinks you should buy the stock.

But I disagree.

Sure, Northland could be right about Glu producing more “hit” games, and making more sales than it was expected to make on smartphone apps. Problem is, no matter how many games Glu is selling, it’s still not profitable today — and, just like Zynga, not expected to become profitable anytime before 2016. And when you get right down to it, that’s really the key to why we invest in companies: We want to earn actual profits, because you can’t pay the mortgage with “accelerating sales.”

A better way to invest
Are there any gamemakers out there that are earning these actual profits, and earning enough of them to justify an investment? Actually, yes, I can think of one.

Paris-based mobile and social gamer GameLoft SA earned $22 million last year, and generated so much cash from its business that it’s free cash flow number was even a bit higher than that ($23.5 million).  At roughly 25 times earnings, and 23 times free cash flow, the stock’s not obviously cheap. But if it can achieve the kind of 20% to 30% profit growth that analysts are projecting for Zynga Inc (NASDAQ:ZNGA) and Glu — and it does operate in the same industry — the price looks fair.

Right now, there aren’t enough analysts following GameLoft to establish a good consensus number for how fast GameLoft will actually grow. That makes the stock a bit of a guessing game. Guess right, though … and you could make a bundle.

The article This Just In: Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he’s currently ranked No. 335 out of more than 180,000 members. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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