I’m going to start by letting you in on a simple-but-powerful investing secret.
And that secret is this: Never buy a company’s stock just because you’re betting on a buyout.
That’s a poor, poor bet.
Now, if you have a stock where you’ve identified multiple potential catalysts – and a buyout is one of those possible big-gain triggers – that’s a different story.
And today we’re going to tell you about two stocks where a buyout is one of those potential big-profit triggers.
So let’s get started…
Two Stocks, Three Reasons to Buy
The two stocks in question are mobile-gaming stocks Glu Mobile Inc. (Nasdaq: GLUU) and Zynga Inc. (Nasdaq: ZNGA).[ad#Google Adsense 336×280-IA]Glu Mobile doubled in just two months after Small-Cap Rocket Alert Editor Sid Riggs gave it to us back on May 16, 2014.
In fact, in an update back in July, Sid shared the fact that he was telling his subscribers to sell half their stake, letting the remaining half ride with no trailing stop – a strategy known as a “free trade.”
It was a timely call by Sid – the stock sold off after that – but Sid recommended folks hold onto their shares.
The reason: The mobile-gaming market is scorching hot, and Sid believed Glu Mobile would come back.
This, too, proved to be a great call by Sid.
Glu Mobile’s shares have come roaring back – and there looks to be plenty of upside to come.
We recommended Zynga back on May 18. It’s a new recommendation, but it’s one we also like very much.
Each of these stocks is poised to benefit from some unique catalysts. But there are three the two companies share:
Buy Reason No. 1: These two companies serve a hot market. We’ve detailed the allure of the mobile-gaming market, which this year will leapfrog consoles to become the biggest slice of the gaming market.
Both Glu Mobile and Zynga are key players in this market, and both are using a “freemium” strategy that’s become the best way to market mobile games.
Buy Reason No. 2: Both firms understand the need to evolve. In my years as a business journalist, I learned the lesson that firms that don’t advance – by definition – fall behind. Both are evolving, adding new games and taking the structuring steps needed to succeed.
Buy Reason No. 3: Both could end up as buyout plays. The mergers-and-acquisitions (M&A) market is as hot as it’s been in years – in many, many sectors. Companies have lots of cash or can access it cheaply. They see the advantage in “buying” market share and in achieving “scale” – corporate-finance lexicon for becoming big enough to apportion your costs over a much bigger slug of revenue.
Private Briefing subscribers have benefitted – 13 of our recommendations have become “deal stocks,” most netting you big gains. Don’t be surprised if Glu Mobile or Zynga joins that club – either buying a rival as a catalyst for renewed growth or serving as a buyout play themselves. Glu Mobile, in particular, is intriguing: As we told you in late April, Chinese Internet up-and-comer Tencent Holdings ADR (OTCMKTS: TCEHY) has taken a 14.6% stake in the company.
We’ll talk about some of the other catalysts another time. But today, we’ll focus on explaining why a buyout of one or both of these companies is very possible.
One of the Hottest Markets Going Right Now
The popularity of mobile gaming is reflected in the fact that the sector’s revenues are expected to surpass console-gaming sales for the first time ever in 2015 and hit $45 billion by 2018, according to a brand-new report from investment bank Digi-Capital.
It’s also the slice of the gaming sector that’s experiencing the most consolidation, the Digi-Capital report states.
And another report – released last week by Mergers & Acquisitions – said the entire gaming market is seeing a lot of buyout deals.
That includes everything from retailers to pre-public game companies.
GameStop Corp. (NYSE: GME), the “go-to retailer” for gamers seeking console titles and other accessories, recently outbid Sycamore Partners’ Hot Topic to buy ThinkGeek, an online retailer of pop culture-themed apparel, toys, and gadgets.
For GameStop, the deal lets it move beyond its core gaming appeal and to get into online shopping.
Sega Holdings Co. Ltd. – once a huge name in the gaming industry – went on a buying binge earlier this year.
After rolling up losses because of its Dreamcast video-gaming system, Sega exited the console business and started acting as a third-party software developer. Then early this year – in an attempt to stay relevant – Sega’s mobile division announced a trio of investments designed to give it a foothold in the Western market.
It bought Demiurge Studios and is purchasing large stakes in Ignited Artists and Space Ape Games.
Demiurge, a game developer based in Cambridge, Mass., was founded in 2002 and transitioned to mobile gaming six years later. It found some success with Marvel Puzzle Quest, a Top 100 grossing app on the iOS App Store and Top 50 grossing app at Google Play Store.
Demiurge CEO Albert Reed joins Sega Networks as vice president of product development and retains his role as studio head.
“Demiurge and Sega share a vision for the future of mobile gaming: Putting gamers first,” Reed told interviewers. “In today’s mobile games you must listen to your players and find new ways to keep them engaged. Our success with Marvel Puzzle Quest comes from our focus on iterative design and testing, with our players in mind.”
Sega Networks bought a majority investment in Ignited Artists, a San Francisco-based studio led by three veterans of the gaming sector. It has yet to release its first real title, but those veterans have more than 40 years of experience at companies like Activision Blizzard Inc. (Nasdaq: ATVI), Electronic Arts Inc. (Nasdaq: EA), Nokia Corp. (ADR) (NYSE: NOK), and the Microsoft Corp. (Nasdaq: MSFT) Game Studios unit.
Finally, Sega grabbed a minority stake in London’s Space Ape Games, also inking a partnership deal that will allow Sega Networks to help bring Space Ape titles to the Japanese market.
“We are delighted to partner with a company with the gaming pedigree of Sega,” said Space Ape CEO John Earner. “Our last release, Samurai Siege, was a success in the Japanese mobile market. With Sega Networks’ experience and record of success, we are confident that Rival Kingdoms, our next game, and future titles will be able to improve upon this success.”
The gaming-sector buyout binge didn’t end there.
Is Buyout Fever Catching?
In March, Nintendo Co. Ltd. (ADR) (OTCMKTS: NTDOY) snagged a $181 million stake in DeNA Co. Ltd. Tokyo (OTCMKTS: DNACF) as a way to bring popular game franchises such as Super Mario Bros. and Pokémon to smartphones, which Nintendo itself never managed to do.
M&A in the gaming market “has become increasingly strategic, such as the recent Nintendo and DeNA deal combining shareholding with commercial partnership to pivot into mobile,” Digi-Capital Managing Director Tim Merel told Mergers & Acquisitions. “Similarly, acquisitions to move into new game genres are on the rise.”
As an example, Merel cited the $150 million purchase of Seattle mobile-games company Z2 by King Digital Entertainment Plc. (NYSE: KING). Z2 is backed by Madrona Venture Group and known for titles such as Battle Nations and Metalstorm.
Even Amazon.com Inc. (Nasdaq: AMZN) is shopping for gamers.
Last year, Amazon bought Double Helix Games LLC, an Irvine, Calif.-based studio known for the game Killer Instinct, for an undisclosed price.
Analysts say the deal was designed to add muscle to an Amazon plan to bring out a gaming-console system to compete with Nintendo and Sony Corp. (ADR) (NYSE: SNE), which makes the PlayStation.
Amazon followed that deal by dropping $970 million for Twitch Interactive, a popular Internet-streaming channel for uploading and watching people play video games.
And one of our favorite profit plays – Alibaba Group Holding Ltd. (NYSE: BABA), already on a buyout binge following since going public last year – is reportedly aiming at the gaming sector, like rival Tencent.
We like Zynga and Glu Mobile for a lot of reasons. But as all this deal-making shows, a buyout of either mobile gamer is certainly possible – especially given the entrance of big players like Amazon and Alibaba into this market.
We’ll keep an eye on each of these for you.
— William Patalon III[ad#IPM-article]
Source: Money Morning