A Small Cap Stock You Should not Miss

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

If you’re in the hunt for a small cap stock with a bright future, Chinese online gaming company Giant Interactive (NYSE: GA) would certainly make the grade. The company has been on a terrific run of late and looks set to get better. It might even turn out to be one of the best investments you might make this year since it offers tremendous prospects, a great dividend and trades at a trailing P/E of just 8 times.

A lot to like

Giant has kicked off the year in style by reporting yet another successful quarter, wherein it witnessed revenue growth of 17% and earnings growth of 35% from last year. Also, it has seen its top line improve on a sequential basis for 12 consecutive quarters now.

Moreover, Giant is a dividend dynamo. It once again proved the same by declaring a regular cash dividend of $0.42 per share, which translates into a juicy yield of around 6.7%. The stock has already gained 15% so far this year and has a strong pipeline of games, apart from a solid strategy. Let’s see how Giant is going about its business and why it’s poised to get even better.

A 6.1% jump in active paying accounts and a 7.4% rise in average revenue per user from the year-ago period indicate that Giant’s games are doing pretty well in the Middle Kingdom. This is the result of the company’s strategy of extending the life of its successful games through expansion packs apart from developing interesting new games.

For instance, Giant’s first in-house first-person shooter Glorious Mission’s single player version turned out to be a huge success. The game has been downloaded more than a million times since being launched in the third quarter last year and the company is already working on an online version of it. Similarly, the company is planning to release expansion packs for its existing and successful games such as Elsword and Allods Online.

Diversification delivers

Giant’s growth is not dependent on just new expansion packs. The company is aggressively moving on to different platforms in order to capture a wide and diverse audience. Giant pulled off a masterstroke last year by launching a micro-client version of ZT Online, its most famous franchise, and tying up with Qihoo 360 (NYSE: QIHU) for operating it.

Qihoo has an active user base of around 450 million, representing 95% of active PC internet users in China according to iResearch. Qihoo’s revenue from operating games has shot up in recent quarters, and this shows in Giant’s results as ZT Online 2 has benefited by delivering incremental revenue. Moreover, Giant’s next expected blockbuster, World of Xianxia, will also be operated on Qihoo 360’s platform and should benefit both companies.

While World of Xianxia is expected to be the biggest revenue driver for Giant this year, the company expects its web games to be the second driving force. Giant will release two web games in the first half of the year to capitalize on one of the hottest gaming trends in China in the form of web games. Thus, Giant’s focus on both web games and micro-client games this year could be a major catalyst.

Mobile is next

It’s evident that Giant Interactive is focused on making its presence felt across as many platforms as possible. Therefore, the company’s newfound interest in mobile gaming doesn’t come as a surprise. Rampant sales of smartphones and tablets have added another dimension to gaming, forcing traditional gaming industry leaders such as Activision Blizzard (NASDAQ: ATVI) to focus on mobile games.

Activision is wary of how the next generational change in gaming hardware might affect its prospects. Hence, it released five mobile games last year and is expected to invest more money in the platform this year so that it could benefit from the huge opportunity in mobile gaming.

Thus, Giant’s decision of moving into mobile is surely a step in the right direction and the company believes that it can deliver its high-quality games on mobile as well. It had started assembling its internal mobile game development team last year and intends to release a few interesting games in the near future.

The takeaway

There is a lot of room for Giant Interactive to run. Its focus on up and coming gaming platforms apart from the continued success of its ZT Online franchise and others should enable it to perform even better this year. Moreover, the fact that the stock sells so cheaply makes it even more enticing. The current quarter might not be as spectacular as the last one due to the Chinese New Year holiday and lack of any new releases, but the company is confident of delivering solid results as the year progresses and even I think the same.  


TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Giant Interactive Group. The Motley Fool owns shares of Activision Blizzard. 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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