Stay Away From This Gaming Stock

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

Sometimes I think that Chinese online gaming company Perfect World (NASDAQ: PWRD) should consider a name change, since nothing has been going perfect (or even close) for it. The company’s streak of terrible results continued in the recently-reported fourth quarter. Revenue fell 12% from last year to $109 million, earnings crashed 67%, gross margin fell 580 basis points, and most importantly, it became clear that not many people are playing Perfect World’s games.

The woes continue

A massive drop of almost 30% in average concurrent users (ACU) led to a 15% decline in Perfect World’s bread and butter business, which is online gaming. Perfect World’s management cited that stringent anti-cheating measures led to the drop in ACU as they try to “maintain a healthy and fun gaming environment for players.” But, investors aren’t having any fun for sure as Perfect World has clung to this line for quite some time now.

Moreover, Perfect World’s revenue guidance for the ongoing quarter once again disappointed, according to The Wall Street Journal. Even this doesn’t come as a surprise, since the company is not going to release any major title in the ongoing quarter. Perfect World is focused on preparing itself for the long run, which is why it has fallen below other gaming companies. The market punished the stock, and Perfect World shares were down more than 10% in late trading.

Falling behind

The company’s lack of new and compelling games is telling on its top line. Most of the games seem to be under development, and are expected to go online later this year. But till then, it seems Perfect World investors would be in for a hard time. The company is planning to release mobile and web games, but if it doesn’t hurry up then it runs the risk of falling further behind.

For instance, peer Giant Interactive (NYSE: GA) is ready with a couple of web games to be launched in the coming months. Giant knows that web games are working pretty well in China now, and the company is moving fast in order to tap the opportunity. Moreover, Giant is progressing well for developing micro-client versions of its games. This has certainly worked for it, while it seems Perfect World isn’t too serious about this trend.

And as far as mobile games are concerned, the space is already too crowded. The likes of Giant Interactive, Shanda Games, and even Activision Blizzard (NASDAQ: ATVI) have already made some solid headway into mobile gaming while Perfect World is still waiting for the right time to “really jump in.” When a bigwig such as Activision is already serious about mobile gaming, I wonder what’s holding Perfect World back.

Activision had released five mobile games last year, and the publisher is scrambling its mobile development team to prepare some high-quality games for the platform. Activision’s traditional business has been doing well, still the company doesn’t want to miss out on mobile, and is looking to diversify itself. But Perfect World is content to watch these developments from the sidelines it seems.

The bottom line

Perfect World’s management is quite optimistic about the company’s long-term prospects. They are diligently working towards achieving market expansion and releasing new titles. The company currently trades at a trailing P/E of under 5 and a forward P/E of less than 1, which indicates that the market doesn’t expect much out of the stock.

Thus, it would make sense to wait and see how, and when, Perfect World achieves a turnaround. Till then, I think investors would be better off putting their money on a solid stock such as Giant Interactive.

Harsh Chauhan 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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