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Chinese online gaming company Giant Interactive (NYSE: GA) has turned in a good performance so far this year, with shares up around 45%. However, there have been occasional hiccups on the way, with the latest one coming after the company disappointed analysts with its outlook and crashed 9%.

However, a company that’s plying its trade in an industry that’s expected to grow at a decent clip of almost 16% a year over the next four years should ideally be bought on such dips. Giant Interactive is a well-known player in the Chinese online gaming space and the company’s portfolio of games has resulted in strong financial performance so far.

An opportunity

However, the company narrowly missed revenue estimates in its recently reported second quarter and its outlook of “flat to moderately up” revenue for the current quarter wasn’t good enough. This led to a massive drop in the share price after it reported earnings, and in the process, opened up an enticing window for investors to buy more shares of this Chinese online gaming giant.

Well, I would say that because Giant is a company that’s trading at a reasonable 11.5 times earnings and will be paying a semi-annual dividend (as opposed to the special dividends it has paid in the last two years) of $0.23 per share in December.

Giant has consistently performed well and the story continued in the previous quarter with active paying accounts increasing 5% from last year and average revenue per user for online games improving 4.8%. Going forward, Giant has a number of moves up its sleeve to get even better from here and the recent drop in share price shouldn’t be a deterrent for investors who are focused on long-term gains.

A slew of drivers

Firstly, the company’s next blockbuster MMO game, World of Xianxia is off to a great start as Giant successfully began closed beta testing for the game. Management states that the game has already started contributing to the top-line by attracting “a sizable user base” and the company has great expectations from the title in the future after receiving solid initial feedback.

This is certainly welcome news for Giant investors, as the company will now have more than one blockbuster game to count on, the other one being its ZT Online franchise. ZT Online has been a cornerstone of Giant’s success so far and the company is continually focused on keeping the game’s momentum intact with expansion packs.

As such, it released new mechanics for the game after taking feedback from gamers and another major expansion pack is on the way in the current quarter. So Giant is doing the right thing by diversifying its revenue stream, and if World of Xianxia does live up to its potential, then, along with ZT Online, it would bring in higher revenue for the company.

Diversifying further

Apart from MMO (massively multiplayer online) games, Giant is also diversifying into other areas such as web games and mobile games. Web games are expected to be one of the biggest drivers behind the growth of online gaming in China, and Giant’s move into this segment is certainly a good sign. The company will be launching two web games in the second half of the year, and management also stated that the first mobile game from Giant’s stable is on its way.

Giant’s management is of the opinion that MMOs carry better prospects for monetization than mobile games, but mobile is an area the company can use to gain additional revenue. 

The potential of mobile is unquestionable, as publisher Electronic Arts (NASDAQ: EA) believes that upcoming smartphone and tablet games will be as graphic-intensive as the outgoing console generation. Keeping this in mind, EA will be redesigning its popular titles for mobile after committing errors by just porting them over for smaller, touch-based screens. Electronic Arts has an arsenal of 15 mobile games in the coming year, and the company’s seriousness shows that Giant shouldn’t ignore the prospects here.

Getting it right

To provide broad exposure to its games, Giant has partnered with fast-growing Chinese Internet company Qihoo 360 Technology (NYSE: QIHU) to operate its games. Qihoo has been growing at a rapid pace and covers 96% of active PC Internet users in China, according to iResearch. The company had 457 million active users in March this year and this is certainly advantageous for Giant.

On its last conference call, Qihoo stated that it is witnessing solid growth of its game platform and is also seeing higher paying user conversion. Its game revenue in the first quarter had jumped an impressive 112% and the company expects better monetization going forward. So, Qihoo’s huge user base and secure platform are important catalysts.

The bottom line

So, while Giant left its guidance a bit open-ended and disappointed investors to a certain extent, the company’s revenue will still grow double digits year-over-year even if it earns the same amount that it did in the previous quarter.

I think that there might have been some conservatism involved as Giant prepares World of Xianxia for launch. But, if you take a look at the strategic moves and an expected annual earnings growth rate of almost 17% for the next five years, then buying Giant after its recent dip certainly makes sense.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends 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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