At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and “initiating coverage at neutral.” Today, we’ll show you whether those bigwigs actually know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS to track the long-term performance of Wall Street’s best and worst.
Wall Street comes un-Glu’ed
Shares of mobile-game maker Glu Mobile Inc. (NASDAQ:GLUU) are taking a tumble in midday trading as investors react to a Northland Securities downgrade (to market perform) ahead of next week’s earnings report.
Details on the downgrade aren’t widely known at present. (Even our usual inside source, at StreetInsider.com, doesn’t seem to know what sparked the downgrade.) What we do know, though, is that Northland, which previously backed Glu stock, has slashed its price target by a third, and now thinks Glu shares are worth only $3. And yet… should this really worry investors?
After all, priced at just $2.40 today, a move to even $3 would equate to a whopping 25% profit for investors who buy today. That’s the kind of proverbial “nothing” that investors wouldn’t ordinarily sneeze at…
Problem is, “nothing” also pretty much sums up the basis for thinking that Glu shares might be worth $3. I mean, the stock’s not profitable, nor is it expected to earn a profit this year. Glu reported losses in excess of $23 million over the past three quarters, while burning through nearly $12 million in negative free cash flow. So while Wall Street analysts, on average, tell us this company is likely to grow its profits at the rate of 30% per year over the next five years, an investor can be forgiven for asking: What profits? And isn’t 130% times a loss really just a bigger loss?
A better idea…
When you get right down to it, it’s really hard to fault Northland for backing carefully out of its buy position on Glu today, before the numbers have a chance to get even worse next week. But that doesn’t mean all gaming stocks should be shunned.
Consider: Glu shares may sell for 2.1 times annual sales, 3.8 times book value, and infinity times the-profits-it-isn’t-earning, but you can own a piece of the much better social mobile gamer Zynga Inc (NASDAQ:ZNGA) for just 1.7 times sales, and 1.1 times book. Zynga isn’t profitable, either. But if you’re dead set on owning a money-losing business, at least you should give thought to buying one that costs a bit less.
…and a few more that are even better than that one
Of course, crazy as it may sound, some people actually like investing in profitable companies. For them, here are three more ideas that might hold more appeal:
Priced at just 6.6 times earnings, this France-based mobile gamer has proven that it actually is possible to earn a profit from simple mobile gaming. The company’s not listed on a major U.S. stock exchange, but can be bought over-the-counter.
In fact, maybe it should be bought. In addition to earning profits, and sporting an ultralow P/E ratio, GameLoft beats Zynga and Glu both when it comes to its price-to-sales ratio (0.6) and its price-to-book as well (0.9). Best of all, GameLoft boasts annual free cash flow of $23.5 million, which is even more than it reports as GAAP net income.