This Gaming Company Might be Down, but it’s Not Out

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It isn’t good news when a company’s top line is shrinking while the industry it operates in is growing. Shanda Games (NASDAQ: GAME), the third largest online gaming company in China, is witnessing a similar decline. In its recently-reported third-quarter, Shanda’s revenue declined 20% from last year to $170.4 million.

I was of the opinion that Shanda might make for a good long-term investment, but now I believe that it would make sense to wait and watch till it registers decent revenue growth. There’s huge opportunity in the Chinese online gaming market, but it seems like Shanda is unable to make the most of it at the moment.

Moreover, there’s stiff competition from both upcoming companies and established players for Shanda to contend with. For instance, the emergence of Giant Interactive (NYSE: GA) with its portfolio of impressive games such as ZT Online is a serious threat for Shanda. Giant Interactive has witnessed solid top line growth this year, and its earnings have also followed suit. Hence, it’s not surprising that Giant has appreciated more than 25% this year while Shanda is in the red.

Going Slow, but Steady

But Shanda is intent on fighting back through its games, and there are some positive indicators. The company’s average monthly active user count went up by 6.2% sequentially, driven by release of expansion packs and new games. However, the number of average monthly paying users did go down 7.9% from the previous quarter as the new content updates had many free features. Thus, it remains to be seen how Shanda would be able to monetize its games and arrest its revenue decline.

The company might not be able to deliver quantitative results now, but management is highly focused on the qualitative part. Shanda is moving in the right direction by improving the life of its games through expansion packs, as these games would turn into constant revenue streams in the future.

Shanda is trying to develop an array of addictive games through its All-Star strategy, and the extension of life cycle of games such as Mir II and Woool is important as these might become its biggest revenue drivers. For example, Activision Blizzard’s (NASDAQ: ATVI) World of Warcraft has been out for seven years now and the company is still extending the title’s life cycle.

The reason behind this is simple – WoW brings in nearly 30% of Activision’s revenues and hence, the company has kept this game alive through expansion packs. Shanda is also following a similar strategy but it looks like the company is taking a lot of time in introducing games. It launched Age of Wushu in the previous quarter and the game has contributed well to Shanda’s coffers.

A Mix of Catalysts

But, most of Shanda’s games are in development and this is one of the reasons why it has seen a sharp drop in top line this year. RIFT, World Zero, Final Fantasy XIV 2.0 and Dungeon Striker are games that are currently under development and could help Shanda revive its revenue.

In addition, Shanda is looking overseas to diversify its revenue streams. It will launch Dragon Nest, one of its most famous games, in Europe next year. Also, Shanda would be launching its other existing games in the international market as well.

Moreover, Shanda is also entering the fray in mobile gaming, which is indeed a smart move. It is developing the mobile versions of Woool and Dragon Nest, along with the Final Fantasy series. These games should help Shanda get into mobile gaming, which is again a very lucrative market considering the number of smartphones and tablets being sold nowadays.  

The Takeaway

Shanda is working hard in a number of areas to bring itself back to life. It has a good number of games in the works, is expanding internationally, and is also focused on tapping the opportunity in mobile gaming. I still believe in the company’s long-term prospects, and also like the fact that it’s trading cheaply at a P/E of 4.52 as compared to peers.

However, I think it would make sense to wait and watch this stock from the sidelines and check whether its upcoming games and strategies can help it record revenue growth once again. Till then, you can add Shanda Games to your Watchlist by clicking here and stay on top of the latest news and analysis on this potential turnaround story. 

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 Giant Interactive Group. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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