With Better Games and Star Partnerships, This Mobile Gaming Leader Will Keep Growing

Shiny, sleek, and amazingly realistic... video games aren't what they used to be...

Nearly every aspect of the industry has improved. Graphics now look lifelike. Storylines within the game are more complex. And you no longer have to play on a bulky console or giant arcade machine.

Now, thanks to smartphones, games can be played almost anywhere.

In fact, mobile games account for 33% of all app downloads. Research firm Newzoo and Activision Blizzard Media (Activision Blizzard's digital marketing arm) estimated that last year alone, 2.4 billion people played mobile games.

And mobile games generated $55 billion in revenue last year.

The growth won't stop there – the mobile gaming market is expected to reach more than $90 billion by 2021.

Today's company is perfectly positioned to take advantage of this growth...

Glu Mobile (Nasdaq: GLUU) is one of the leaders in mobile games. It boasts popular games like MLB Tap Sports Baseball, Design Home, and Deer Hunter.

It used to focus on short-term hits. But in recent years, Glu has revamped its game portfolio.

These games would generate tons of hype and demand when they were released. But the demand quickly faded. Glu only got about six months out of these types of games before it was back to the drawing board, looking for the next short-term boost.

Now, instead of focusing on short-term hits, the company creates games with a more long-term focus. The games are meant to grow steadily over time as a user base develops. Everything about them is designed to encourage users to spend time and money in the game.

What's more, Glu doesn't release games until they're ready. It hires the best people it can find. Then it lets them build teams organically within the company. That's led to slower development, but higher-quality games.

And this approach has attracted interest from some of the most successful content creators in the world. Glu recently released a game with Disney and Pixar. It also has a game in partnership with World Wrestling Entertainment.

This switch has paid off.

Sales grew by double-digits in each of the last three years without the company having to release those flash-in-the-pan games.

Like many mobile gaming companies, Glu makes most of its revenue from "micro-transactions." These transactions occur when users download a game that is usually free to play at the start. But players can then spend money to unlock more features within the game.

Take, for example, its Design Home game, which lets players design home interiors.

But to access all the design elements, you need to spend money. So, the initial game is free, but users need to pay for the best experience.

And it's clear that users are paying up for the better experience. In the fourth quarter, in-app purchases amounted to more than $96 million (up from $85 million year over year) – that's nearly 90% of Glu's total bookings (revenue plus deferred revenue).

Glu also advertises within its games, but this is a relatively small part of its business. Ads only account for 11% of Glu's total bookings.

And Chinese gaming giant Tencent (TCEHY) has taken notice of Glu's strength.

A little over four years ago, Tencent began acquiring a stake in Glu. Now, Tencent is the largest investor in Glu, owning around 14% of shares. And it has a board seat as well.

Given that Tencent is the world's largest gaming company... This is a great relationship to have.

Glu COO and CFO Eric Ludwig has described Tencent as a "sister studio." Tencent has revealed some of the most important secrets to making modern games. "They've really helped us in terms of live operations for our games," Ludwig said. This includes things like "live events, and guilds and clans, and clubs," he added.

This helps build out a social aspect in the games – which makes them even more popular. Players are looking for engagement and competition with friends.

When it works, the results are incredible. Just take a look at Glu's most recent quarterly report.

On Wednesday, Glu reported one of its strongest quarters yet. Both bookings and revenue came in above estimates. And it reported record bookings for its Design Home and Covet Fashion games... while Tap Sports Baseball had its best fourth quarter ever.

Overall, 2019 marked Glu's highest-ever bookings year.

Shares jumped more than 20% on the news.

Mobile gaming is a huge, rapidly growing trend. And Glu Mobile's shift in focus toward long-term games ensures that the company is at the forefront of it. That should be a continued tailwind for GLUU shares for years to come.

Sometimes investing is simple.