MSNBC.com
House of Flying Laggards
China's leading online game specialist delivers another great quarter, but the market doesn't notice.
By Rick Aristotle Munarriz
Motley Fool
Updated: 8:50 a.m. ET May 17, 2005
Don't you hate it when you're right but the market still rings you up as wrong? When we singled out Shanda Interactive(Nasdaq: SNDA) in our Rule Breakers newsletter service back in December, we based our call on the premise that the leading online-gaming specialist in China would continue to grow. We believed that more of the world's most populous nation would migrate to the Internet, and that people would have more disposable income for leisurely pursuits as the economy improved.
Last night, the company's March quarter confirmed what its December quarterly showing had indicated: Growth is booming at Shanda. First-quarter net revenues soared by 118%, while improving margins saw earnings climb 163% higher to hit $0.36 per stateside share.
Gross profit margins improved to 71%, while net profits came in at a huge 44% showing. Think about that for a second. Of every dollar in net revenues that the company produces, 44 cents jingle and jangle to the bottom line. OK, we're talking renminbi yuan, jiao, and fen -- not our domestic currency of dollars and cents -- but you get the point. Like fellow online gaming heavies NetEase.com(Nasdaq: NTES) and The9(Nasdaq: NCTY), the latter of which reports next week, Shanda is in the right niche at the right time.
Shanda also continues to make good use of its growing audience. It is partnering with Vivendi's (NYSE: V) Universal Music to skim some money off digital downloads as well as teaming up with the leading Chinese language search engine developer in Baidu. Its clout has also helped it flesh out its game offerings as well. Along with the minority stake it acquired in Sina(Nasdaq: SINA) earlier this year to give itself a bolder online imprint, Shanda seems to be doing everything right.
So why is the stock trading in the low $30s? Since its newsletter recommendation, when the stock was priced at $39.87, Shanda has seen its shares wither by 15%. It's been a market laggard. Two great quarters later, the company either has the cooties or it's looking like a great buying opportunity for those who have read the original buy report and who understand why the company is going to matter even more in the future.
Yes, on a sequential basis, earnings came in two pennies shy of the $0.38 a share it earned back in the December quarter. But the results were still better than the $0.33 showing that market analysts had been expecting.
Over the past four quarters, the company has earned $1.24 a share. That prices the company at just 27 times trailing sales. Online companies growing that quickly -- and you know who you are, Google(Nasdaq: GOOG) and Yahoo!(Nasdaq: YHOO) -- command an earnings multiple much higher than that. While there are greater risks involved in buying an overseas company, one can also argue that the potential rewards may also loom larger.
So this is not a house of falling cards or even flying daggers. Like the three protagonists during the snowy theatrical climax in the stunning House of Flying Daggers, Shanda is simply bloodied and misunderstood.
Thankfully, these wounds are not internal. They will heal. In time.
If you've got the time, here are some more related items:
We were excited about the region a couple of years ago.
Check out the latest ultimate growth stock recommendation in our Rule Breakers newsletter service.
Why not discuss the country's investing potential in our China Connection discussion board?
Longtime Fool contributor Rick Munarriz believes in the sector, but he does not own shares in any of the companies mentioned in this story.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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