I’m adding to a position in GlassesOff (GLSO) that I started last year. The precipitous decline is inconsistent with a $5 million private placement announced yesterday at $1.25/share. This new capital injection alleviates the biggest risk that hung over investors the last few months. The weakness ahead of the offering was understandable, however, as the deal lacks warrant coverage and hasn’t any dilutive instrument attached to it, I’d argue this financing is a reason to add or start a position in GlassesOff, particularly if you’ve been on the sidelines waiting for an entry signal.
Before I jump any further into this, I’d like to mention that I’m generally cautious when it comes to investing in what I can only term as “mobile”. It’s an unproven business and thereby carries extraordinary risk. But I can’t help but own GlassesOff and another mobile app maker, Glu Mobile (GLUU), however for different reasons. That said, I’m avoiding Zynga (ZNGA) and King Digital Entertainment (KING) and I wouldn’t own larger tech names, for instance Facebook or Twitter, at least as a play on ‘mobile’ [without going into detail on either of these names, I might consider owning Facebook even as they aggressively invest into mobile, but not explicitly because they're investing in the opportunity].
GlassesOff Platform Carries Broad Application; All Eyes On Management To Capture Share of Multi-Billion Dollar Opportunities
GlassesOff has developed a disruptive application (called GlassesOff) to redress a problem affecting close to a billion people worldwide. As you age, your ability to focus on near objects diminishes. Objects near you appear fuzzy. This kicks in as early as your 40s and affects virtually everyone by your 50s. Medically, it’s called presbyopia. GlassesOff is a misnomer. The company makes an app that consumers “play” but it’s hardly a game comparable to something like ‘Candy Crush’ which is made by King Digital. Underlying the GlassesOff app is a statistically significant study out of UC Berkeley that showed subjects who used GlassesOff reduced their biological eye-age, on average, by 8 years and were rid of the need for reading glasses for common tasks, such as reading a newspaper. Importantly, the study results were published in Nature’s Scientific Reports, widely considered the gold standard of journal publications. The reason I own GlassesOff isn’t because I’m expecting all several hundred million downloads in the next quarter, rather, I think the technology underlying the company has broad applications in non-medical uses. And I suspect is actually “works”.
Nature published a second study by GlassesOff in February of this year observing a visual processing benefit correlated to improved vision sharpness – which is the initial claim and the basis of GlassesOff, both the app and core technology. The study is available for review here and best summarized in a company release, from which I quote:
[…]Nature’s Scientific Reports published the results of a new study, which provided additional evidence of the correlation between the fovea, which is part of the retina, and crowding, processing speed and vision sharpness. The findings demonstrate that the GlassesOff technology may be applicable to improved performance of daily tasks, such as sports, reading, driving [emphasis added], and more.
The study included 178 participants (40 normal young participants and 138 older participants experiencing the inevitable “aging eye” symptoms). GlassesOff scientists have been able to demonstrate, for the first time, the effect of “crowding” within the fovea. Crowding is the inability to recognize objects in the presence of adjacent objects, such as identifying a letter within a word. The findings demonstrate that enhanced processing speed of the brain may overcome crowding effects.
GlassesOff reported in their quarterly results that but a few thousand people actually paid for the premium version of GlassesOff (which is a game played over the course of ~3 months). While the results may appear dismal by themselves, the company spent just $310k on sales and marketing. As the company explained, the app was limited to iOS users and the objective was to source enough users to get feedback on the product, the robustness of the backend, and work out any kinks before launch/roll-out nationally and internationally. Based on GlassesOff ranking as the top downloaded iOS app (and among the top 10 for an extended period) in health/medical category, according to topappcharts.com, I suspect total downloads were in the neighborhood of several hundred thousand. Importantly, with this new capital injection, and an Android version of GlassesOff slated for release by the end of this quarter (Q2), the company will have a much more robust marketing budget for their initial product, GlassesOff. If we extrapolate from results seen thus far (which is worst-case scenario, in my opinion) I’d be shocked if downloads aren’t in the neighborhood of several million by year-end. If this product works as well as the data, and people I’ve conversed with, suggest, it’s possible we’ll see viral adoption.
Further, the second study referenced (above) gives us a much more interesting twist on the opportunity. Presbyopia affects close to a billion year worldwide. Conservatively, half probably cannot afford the app or have access. Notwithstanding, the addressable market is still enormous. At ~$60, GlassesOff would need to sell just 1.67m copies to draw $100 Million in revenues, not including recurring revenues from ongoing maintenance use (consumers pay a small monthly fee to maintain the benefit of being glasses-free following initial use). But the real kicker is opportunities like using GlassesOff to train athletes who rely heavily on reaction speed (which, as it happens, is almost every sport). Jason Napodano does an excellent job of explaining how this works on a scientific level – and how, as an example, a little league baseball player might benefit from using GlassesOff (though, I imagine it’d be called something else for this application). The takeaway is that GlassesOff believes they can inexpensively re-create a game for baseball players that will improve their vision sharpness. Since their recent study says vision sharpness improves reaction speed, a baseball player who uses GlassesOff successfully should theoretically be able to improve his or her batting average as a result. When you think about it, the application in sports is almost endless, and more importantly immense. If presbyopia is big, sports is just as big if not bigger. Several billion.
My confidence in this mobile play is also an extension of GlassesOff Chairman Shai Novik’s track-record, particularly with Prolor Biotech, which was acquired by Opko Health (OPKO) last year. Prolor had a once-weekly formulation of a multi-billion dollar growth hormone in Phase III development at the time. But perhaps more importantly, Prolor owned the IP on several potential multi-billion dollar drugs. The phrasing of Opko’s announcement suggests Prolor was acquired for its platform rather than for its lead compound alone. At the least, the platform weighed heavily on the takeout price, which approached $550 Million upon closing. I think GlassesOff mirrors Prolor’s platform in its earlier days, before anyone really paid attention.
Glu Mobile Trades Down on Systemic Profit-Taking; Shares Attractive At These Levels
When I wrote about Glu Mobile back in February, I’d expected shares to rise in advance of what I believed would be a strong upcoming quarter for the company. It was. Mark Gomes does an excellent job of breaking down the results, and if I may I’d like to borrow a few of his thoughts (as they mirror my own).
First, the numbers:
“Estimates are calling for 18% growth to $188 million in revenue, but the market is growing at closer to 30% annually. The top companies are gaining share as the market consolidates, so I believe GLUU can at least match the market growth rate and generate over $215 million in sales next year.
Either way, the stock looks much undervalued. Its enterprise value is currently just 1.5x next year’s estimate. As investors wake up to GLUU’s new-found capabilities and execution, I believe the stock can fetch 3x my 2015 estimate, or $8 per share. Looking out a year, investors will start valuing the company on 2016 revenue estimates, which should rise another 25%+ to over $275 million. A 3x multiple on that number gets us an enterprise value of $825 million and a share price of over $10, roughly triple its current levels.”
Consistent with past performance, the company topped analyst estimates in their quarterly report released on April 30th for the twelfth consecutive quarter increasing year-over-year revenues 90%. Glu’s success has not only been contingent on their ability to release popular game titles, rather, their innate ability to proliferate revenues from the restructured monetization platform management implemented over the past years. True to form, the “Freemium” business model alongside increased advertising margins, outlined in my article from February, continue to bear fruit for the company with no signs of slowing down in the foreseeable future. When you add popular game titles, like Deer Hunter, into the revenue monetization platform formula, it equates to success, with the company anticipating to turn in an annual profit (non-GAAP basis) by the end of the year.
Of particular importance, the company’s ability to apply their revenue model across a number of popular titles successfully, leverages the risk associated with a game developer having a one-hit wonder. With a company like King, future profits are contingent on their ability to create or acquire another Candy Crush-esque game with immense popularity, with an inability to do so resulting in dwindling revenues and profits. We all understand that games like Candy Crush and Deer Hunter alike will not be popular forever, so harnessing the monetization platform’s transformational ability to make games more successful is. The profitability driver is a key component in Glu’s model that compliments the global mobile-device boom, which maximizes profits where the competition cannot.
Understanding the guise in other mobile-game developer’s business model, Glu has recently acquired PlayFirst, the creator of the popular Dash game series. It is my opinion that the company intends to apply their monetization capabilities to games that are loved by users, yet yield lackluster profits to the creators. This opens an immense opportunity for growth, as successful acquisitions could grow the company at a rate that outpaces competition and keeps in line with the industry as a whole. We can speculatively confirm that this is Glu’s intentions. The company filed a $150 million shelf, which essentially means the company mayraise money in the near future. Successfully raising the capital would solidify Glu’s financial ability to execute on their business strategy, which has begun to reach into attractive acquisitions.
The recent retraction in share price, can mainly be attributed to the recent downtrend experienced by the tech sector as a whole. Investors anticipating the $150 million raise have also contributed to the sell-off. The disconnect between investors here is seeing the risk, dilution in this case, as opportunity as the capital raised will be invested in strategic acquisitions. Typically, acquisitions can grow revenue and earnings more rapidly by taking other companies’ equity and making those companies/games much more profitable, something we know Glu is capable of doing. Understanding the capital infusion as a catalyst, prevalent in both Glu Mobile and GlassesOff, resources will allow management to strategically execute their plans for growth whether it is acquisitions or marketing. The unsubstantiated decline of the stock’s price related to misunderstood value of these companies raising capital creates immense opportunity for investors to either initiate a position or add shares before the intrinsic value of the capital injection is apparent.