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My take on Shanda Games (GAME)



December 02, 2009 – Comments (9)

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. 

9 Comments – Post Your Own

#1) On December 02, 2009 at 4:01 PM, lemoneater (57.86) wrote:

Where is Varchild when you need him? He has a lot to say about gaming stocks.

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#2) On December 02, 2009 at 4:08 PM, rd80 (95.95) wrote:

You can't rewrite a pitch, but you can reply to your own pitch to make updates if you want.

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#3) On December 07, 2009 at 1:43 PM, lemoneater (57.86) wrote:

"virtual gift"

Merry Christmas!

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#4) On January 27, 2010 at 10:59 AM, outoffocus (23.80) wrote:

Just bumping thos post back up.  At the time I wrote this GAME was selling in the $10s.  Now its down to the $8's.  May be a better buy at this point.  I need to do more analysis.

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#5) On March 01, 2010 at 9:59 AM, outoffocus (23.80) wrote:

An update.  The recent earnings report caused the share price to drop down below $7 per share. Though I don't think the selloff is justified, it does seem like the current price is more in line with valuations.  My problem is with Chinese stocks it seems like its either hit or miss. Either the stock will perform extremely well or it will perform extremely poorly.  This stock like many other Chinese stocks are highly speculative.

One thing I found insteresting is the share repurchases.  GAME has authoriized the repurchase of up the 150m ADS shares over the next two years.  Will this action help put a floor on this stock price?

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#6) On March 01, 2010 at 10:15 AM, gspchamp999 (29.05) wrote:

Can you explain why there is the selloff with a seemingly good earnings report?

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#7) On March 01, 2010 at 10:36 AM, outoffocus (23.80) wrote:

I honestly dont know the true reason. I can only speculate.  All I know is this stock IPO'd at an extremely high price compared to its actual valuation. 

 The selloff could have been triggered simply by the highly speculative nature of this stock.  High risk generally means huge price fluctuations.  If a company's earnings dont live up to the risk in the stock (high risk/high reward), that in itself could trigger a selloff. Though GAME has good earnings, their current earnings may not justify the risk.

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#8) On March 01, 2010 at 11:06 AM, outoffocus (23.80) wrote:

GAME has authoriized the repurchase of up the 150m ADS shares over the next two years.

Correction: $150m of ADS shares.

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#9) On March 02, 2010 at 4:38 PM, Varchild2008 (83.77) wrote:

I've spoken and near term traders were RIGHT to get out of (GAME) after earnings report.....

Because this is about MARKET SHARE... and GAME just announced the first signs of DEATH to their best franchise title....

People not spending in MIR II premium shop means they must be spending $$$ subscribing to other games like World of Warcraft...  Consumers are probably getting *bored* with MIR II.

In comparison to World of Warcraft.... The MIR Franchise is about the same age.... MIR I  released around 2001....

MIR II came out in 2005.... then Legend of MIR III  about 2007.

The problem is the game is way outdated in graphics and gameplay compared to World of Warcraft.... and CHINA is getting the Burning Crusade and Wrath of Lich King expansion packs sometime this year....

My hope though for GAME is MOCHI MEDIA and GOLDCOOL games and the other deals creating new revenue streams of Shanda Games.... hopefully they can win back video gamers for their Turn Based MMORPG to release in Q2.

There's still some good left in GAME... despite the frightening Market Share Loss in MIR II. 

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