This Online Gaming Stock Looks Like a Winner
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have covered a couple of Chinese gaming stocks this earnings season and both of them looked enticing. While Giant Interactive (NYSE: GA) had brushed aside guesstimates in its most recent quarter, Perfect World (NASDAQ: PWRD) continued on its roller coaster ride.
Giant’s revenue jumped even though the company didn’t release any new game in the quarter, something that can be interpreted as quite fantastic as it shows the longevity of the games it develops. But Perfect World wasn’t as lucky. It missed analyst expectations in the previous quarter and saw its stock drop. However, the prospects of both these companies are quite bright moving forward and I had given you good reasons as to why I think so in my previous posts.
There’s one more stock that deserves to be added to this league. Shanda Games Limited (NASDAQ: GAME) recently came out with strong earnings in the first quarter, beating estimates on both top and bottom lines. The results don’t surprise me at all. The company has been following a meticulously designed plan -- the Triple-A strategy -- for the past year and they have started showing results. Let’s see how it is working for Shanda and where it could take it in future.
Focusing on longevity
The first “A” in the company’s Triple-A strategy stands for All-Star. Under this strategy, Shanda focuses on developing gaming franchises that can build a strong following and can sustain for years after their release. A few games developed under this program are Dragon Nest, AION, MapleStory and Legend of Immortals, which drove the company’s top line to $221 million in the quarter, up 11% from last year. Shanda pushed out expansion packs for these games during the quarter and this helped its performance.
The company is slated to release a number of games going forward. Titles such as Age of Wushu, RIFT and World Zero are currently being developed and are expected to be launched toward the back end of the year. Also, Shanda would be pushing out the next expansion pack for Dragon Nest and upgrade other titles such as Woool and Mir II as the year progresses.
The All-Star strategy has worked wonders for Woool and Mir II, as the two games grew tremendously in the quarter and accounted for half of Shanda’s revenue. The next round of updates will probably extend their life further and help the company generate fatter revenue in the second half of the year. And as this strategy is further applied to other games in Shanda’s portfolio, the stock will hopefully see better times ahead.
Expanding across platforms
The next “A” stands for All-Platform strategy. As the name suggests, Shanda is focusing on developing games across platforms such as the web, mobile and micro-clients (which enable users to download a mini version of the game, usually less than 50 MB and hence save time). This will certainly help the company in increasing its addressable market and expand its scope for revenue generation.
The company has also obtained the license for operating Final Fantasy XIV, one of the most famous massively multiplayer online role playing games (MMORPG) ever through its strategic partnership with Square Enix. Shanda’s partnership with Square Enix will allow it to develop mobile versions of Final Fantasy games, another reason to be positive over the long term.
Penetrating new markets
The last “A” signifies Shanda’s All-Region strategy. The company is looking to expand its web across geographies and has seen rapid growth in its international business for some time now. Shanda has forayed into markets in Singapore, South Korea, Russia and Indonesia. It is integrating the All-Star strategy in these regions and expects to deliver long-lasting legacy games. Shanda anticipates its global growth to continue at a fast clip as it looks to execute its business model in new regions.
The takeaway
The Chinese online gaming market is a burgeoning one and Shanda is one of the leading players in it. The company had won a number of accolades in January this year at the China Game Industry Annual Conference. Shanda is looking to build on its leadership position and its Triple-A strategy is a step in that direction. With a robust pipeline of games, strong visibility in the Chinese gaming market and expansion across markets and platforms, Shanda has the makings of a winner.
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