Why Buying This Stock Makes Sense After Its Recent Dip

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

Shares of Chinese online gaming company Giant Interactive (NYSE: GA) have been under pressure over the past few days after the company announced that Vogel Holding Group Limited, an affiliate of its chairman, Mr. Yuzhu Shi, will be selling its shares. Vogel had initially decided to offer 15.1 million American depository shares, but the offering was reduced to 11 million shares with the option of selling another 1.65 million shares in a 30-day period.

With the stock flirting with 52-week highs and having gained around 60% this year prior to the news, Mr. Shi chose an opportune moment to cash out. The stock has dropped around 10% since the offering was announced as investors would probably be having reservations as to why the chairman has decided to sell. But then, with the stock having appreciated tremendously, that question has an obvious answer.

Now, since this is a secondary offering by a selling stockholder, Giant won’t receive any proceeds from the transaction and there won’t be any new shares issued. As such, I think it’s a good time for retail investors to buy shares of the company after its recent dip as its prospects are promising and valuation is enticing.

Solid prospects

Being one of the major players in the booming Chinese online gaming market, there’s a lot of opportunity for Giant to grow its revenue and earnings, and so far, the company hasn’t disappointed. It has been growing its revenue and earnings at a decent clip over the past year and has kept gamers engaged through different strategies. The company has a pretty solid track record of quarterly results and its moves to grow its business should keep the trend intact.

Giant has been pursuing different areas of expansion as it looks to benefit from the proliferation of online gaming in China. Its games have generally been well-received so far and the company does its bit to enhance their popularity through the tried and tested method of releasing expansion packs.

Active paying accounts and average revenue per user have been increasing, as was seen in the previous quarter, and Giant is looking to keep up the momentum by releasing new games and venturing into platforms such as mobile, web games, and micro-client games.

ZT Online, one of the company’s most famous franchises, has done pretty well so far and an expansion pack in the previous quarter propped up revenue. Throw in the expectations from the company’s next high-profile game, World of Xianxia, which has exceeded Giant’s expectations in closed beta testing, and there are some solid reasons why Giant’s growth engine should continue revving up.

More importantly, Giant has chosen a good distribution partner for its web games in the form of Qihoo 360 (NYSE: QIHU). Giant had opted for Qihoo’s platform for operating the micro-client format of ZT Online 2 and recently it decided to operate another web game, The Sky, on the same platform. Going forward, even World of Xianxia is expected to be distributed by Qihoo.

This is undoubtedly a very fruitful partnership for Giant as Qihoo is a fast growing internet company in China with a user base of 457 million at the end of March. More importantly, Qihoo is well known for its security products and this should add to the confidence of users. Also, the company witnessed a 102% jump in paying users of its web game platform and this bodes well for Giant.

Moreover, Giant is also looking to expand into mobile, but it isn’t in a hurry to do so. The company is of the opinion that MMORPGs (massively multiplayer online role-playing game) offer better monetization prospects than mobile but it won’t be wise to leave that area untouched.

For instance, NetEase (NASDAQ: NTES), which, like Giant, has been focusing on its MMO games to improve its top line has also forayed into mobile. It had 75 million installations of its mobile games at the end of the previous quarter and 29 million daily active users. To further improve its mobile prospects, NetEase will launch more games for mobile this year.

Thus, even though Giant thinks otherwise, it wouldn’t be prudent to leave mobile untouched and thus, it has decided to test the waters with one mobile game this year.

Valuation and takeaway

Another enticing part about Giant, as I’d said earlier, is its valuation. The stock trades just 11 times trailing earnings and this comes down to 7.5 on a forward basis. Its PEG ratio is just 0.60, which gives investors another reason to buy the stock on the weakness that it has experienced of late.

The company has paid juicy annual dividends in the past, like it announced a dividend of $0.42 per share earlier this year, and has now decided to pay a semiannual dividend from this year. Moreover, Giant is a debt-free company and has $480 million in cash, which should help it in its expansion moves going forward.

Hence, there are some very good reasons why Giant is worth buying after its recent dip as the company’s long-term prospects are still intact, it’s not expensive, and pays a solid dividend as well.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Giant Interactive Group 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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