A Perfect Opportunity for Getting into this Game
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Life can be cruel at times -- these words must be ringing in the heads of Perfect World’s (NASDAQ: PWRD) investors.
Two months back, the company’s investors were in a joyous mood after a strong end to fiscal 2011. The shares had jumped an amazing 27% after the fourth quarter results and Perfect World decided to give away a special dividend of $2 as a celebratory gift.
However, all that came crashing down in the first quarter this year after it missed the Street’s expectations on both top and bottom lines. Perfect World’s world was perfect no more as the stock plunged as much as 16.5% after results were announced. The stock did fight back and ended that day with a 6% loss. The stock is again in free fall mode as I write this and my screen shows it is losing almost 5% so far. But I am not changing my stance on Perfect World from my last post even though it has taken a lot of stick over the last two days.
The game pauses…
The story behind Perfect World’s gaping miss is pretty simple to interpret. An online gaming company rakes in revenue when people are playing its games. Moreover, it keeps releasing new titles and expansion packs or carries out marketing activities to keep users hooked. Perfect World fell short on many of these counts, but the blame doesn’t lie entirely on the company.
The Chinese New Year kept many players away from their screens, taking a toll on Perfect World’s top line. It seems that the company had correctly anticipated player sentiment and didn’t release any major title in the quarter. It rightly focused mainly on extending the timeline of its current army of games.
The number of players playing Perfect World’s game declined sharply to 804,000 in the quarter from 873,000 in the one preceding it. Licensing revenue also dropped around 25% on a sequential basis due to the lack of any major title launch. But all the misgivings this time around were because of seasonal factors. Moreover, the company wasn’t sitting idle and has enough fuel in the pipeline to light up the Street in the future.
…only to resume at a greater speed
Perfect World is slated to release a slew of games as the year progresses. Return of the Condor Heroes, a massively multiplayer online role-playing game (MMORPG), is slated for a summer release this year. Expansion packs for the company’s famous titles such as Zhu Xian, Perfect World II and Forsaken World are also lined up. In addition, Perfect World will be releasing games such as Saint Seiya Online, Dragon Saber and Heaven Sword in the second half of the year.
Another noteworthy aspect of Perfect World’s development plan is its global expansion. The company had acquired game studios in the U.S. like Zombie Studios and Cryptic Studios. These are developing games such as Neverwinter and Torchlight and have already launched Blacklight Retribution and Star Trek Online. Perfect World is also growing its licensing network through tie ups in Brazil, Indonesia, France and Germany. The company’s international network now spans across more than 100 nations, fetching more than 25% of Perfect World’s revenue.
Risky but good
The stock might have been hammered and investors might be searching for visibility of growth. Perfect World might not be a famous online gaming company like Zynga, but it is certainly better. If stock performance was the only criteria for picking a better company, Perfect World wins hands down as it has lost just 1% of its value so far this year as compared to Zynga’s 36% decline.
Also, Perfect World is fighting tooth and nail with arch-nemesis Giant Interactive (NYSE: GA) for market share and its efforts were bearing some fruit. Giant had posted a terrific quarter earlier this month and its prospects look bright. Giant might even seem to be the better pick against Perfect World but you need to remember one thing. China is the largest online gaming market on the globe and is growing at an astounding rate. The industry might become as big as $13 billion over the next two years and it will certainly provide enough room for players such as Perfect World to piggyback on the industry’s rapid growth.
More so, Perfect World is working hard at making its presence felt across the world and its R&D team is putting in a lot of effort to develop new games, two moves that will probably help it deliver more value to investors. The recent drop in shares seems like an opportunity to buy into this Chinese online gaming stock and reap the benefits when users get back to their screens and play its games.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.