This Online Gaming Stock Looks Good for the Long Run
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The online gaming companies in China have had a difficult time this earnings season. A few of them, such as NetEase (NASDAQ: NTES) and Perfect World, were hammered into the ground after their results and outlook failed to satisfy the Street. But some, like Shanda Games (NASDAQ: GAME) and Giant Interactive (NYSE: GA), have managed to buck the trend and have saved their investors from the agony of a stock price plunge.
A Slight Pullback
Shanda Games’ second quarter results were a mixed bag, with the game developer beating the bottom line estimate and falling short on the top line. A drop in subscriber count has been a common problem for the game developers this earnings season and the same problem haunted Shanda as well.
Revenue from online games operated in China and abroad declined in the quarter as the company didn’t go all out to monetize its games in the quarter and focused on improving the life cycle of its legacy games. Moreover, Shanda also cited macroeconomic uncertainty as a reason it is treading cautiously and keeping its cards close to the chest.
Catalysts Ahead
As a result, Shanda decided to wait before releasing any new titles or expansion packs in the previous quarter, believing that its games would have a better chance of doing well in the second half of the year. But the company wasn’t sitting idle in the quarter as it continued to improve its existing games in order to extend their life cycle.
In addition, Shanda follows a very methodical strategy of growing its business, known as the Triple-A strategy, which I had discussed in detail the last time. In concurrence with this strategy, the company has a number of games that it intends to release going forward, such as Dungeon Striker, Ghosts 'n Goblins, Age of Dawn and Age of Wushu among others. Apart from these, Shanda is also slated to launch the improved versions of Woool and Mir II in the future.
Spreading it out
More importantly, Shanda has a diversified portfolio of games and is looking to reduce its dependence on a single game. Almost one-third of its revenue is derived from Mir II. While releasing an upgraded version of this game would most probably give Shanda a shot in the arm, the company knows the pitfalls of depending on one game for a major portion of its revenue. Hence, its efforts towards diversifying its revenue base are certainly a positive. It has received encouraging feedback for Age of Wushu and the expansion packs for Dragon Nest and Woool and expects these games to take some burden off from Mir II.
Mobile Gaming – the Next Big Thing
Also, Shanda is focusing on launching its games to other platforms as well. It intends to release Legend of Immortals and Mir II in micro-client versions, which should further improve its audience. And the company is going mobile and released the mobile version of Woool, known as Woool of Paladin last month. The game has been quite a rage initially as it was downloaded more than a million times and still counting.
But what’s more, Shanda has 10 more mobile games in the pipeline. We have already seen Glu Mobile (NASDAQ: GLUU) profit immensely from mobile gaming. Glu’s top line has been on a rapid surge of late and the company is set to do more going forward. While Shanda isn’t Glu class yet in mobile gaming, its focus on mobile games is surely a positive as it would drive its top line higher.
Don’t Blame the Industry
I agree that the bygone quarter hasn’t been a stellar one for online gaming in the Middle Kingdom, but the potential is huge. The faltering results of the game developers aren’t exactly a result of a weakness in the gaming industry. For example, NetEase had a troubled quarter as Activision Blizzard’s (NASDAQ: ATVI) World of Warcraft, which NetEase operates in China, saw a fall in subscriber count. However, WoW is expected to get up to speed again when Activision releases the next expansion pack this month.
On the other hand, the strength of the industry can be seen through Giant Interactive’s performance. Although the company didn’t release any games or new expansion packs in the previous quarter, its top line went north along with the number of active playing accounts. In addition, a bulky dividend yield of around 6% is another reason you could take a look at Giant.
The Takeaway
Shanda is coming off a mixed quarter and expects its top line to diminish slightly again in the current quarter. However, the company is focused on delivering shareholder value in the long-term and is working towards its goal with a well laid out strategy. In addition, Shanda is the third largest player in the online gaming market in China and stands to gain immensely from the industry’s growth through its strategic moves.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and NetEase.com. 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.
