My take on Shanda Games (GAME)
Since I can't rewrite my pitch on GAME and I dont want to close my green thumb, I'll put my thoughts here.
The Chinese Gaming market: When I first saw the GAME IPO I got excited. I love MMORPGs and I know firsthand what a cashcow those games can be (people literally pay real money for pixels). I thought that the Chinese market is a good market to tap into. However, the PRC in their infinite wisdom decided they want to restrict the free market when it comes to online games. On the surface, it seems like the PRC wants to allow China to become more capitalistic. But the more I dig into their policies, the more I see the PRC with a loaded gun aimed at their own foot. Theres also that pesky little issue with China pegging their yuan to the dollar, which (with the dollar tanking right now) hinders the purchasing power of Chinese consumers.
Shanda Games valuation: GAME came out with earnings last night. Ignoring the fact that they missed earnings estimates by a penny per share, I thought GAME had a pretty good earnings report. For instance, net revenues increased 45% year-over-year and 10% quarter-over-quarter. The stock initially spiked after hours then tanked in premarket. I initially thought that the stock price decline would be a good opportunity to pick up some more shares. Then I looked at the valuations.
Currently GAME is trading at roughly 7.5x book value and 18x earnings*. When I checked some of the other online gaming stocks, it seems they also trade and extreme multiples of book value but the P/Es are generally between 10-12. The good news for now is that GAME's forward P/E is around 10.5.
Conclusion: Based on these numbers and the I think that GAME's share price could decline further in the near term. However, if the PRC puts the gun away and allows the free market to rein in their country, this stock could take off.
Anyone else have any thoughts?
*These numbers come from on my own personal calculations based on the most recent earnings reports.