It was exactly a year ago when I’d recommended that investors buy Chinese online game developer Perfect World Co., Ltd. (ADR) (NASDAQ:PWRD) after the stock had crashed following a terrible first-quarter report. One year on, I see that the stock has appreciated close to 40%. However, almost all of the growth has happened since 2013 began and the stock soared earlier this week after the company posted better than expected results.
One year back, I was convinced that the company would be able to rescue itself, under the belief that the weakness in its business was temporary. However, one year later, I’m not as bullish as I used to be as Perfect World Co., Ltd. (ADR) (NASDAQ:PWRD)’s revenue has gone downhill, earnings have been dropping, and the turnaround which I was waiting for since last year hasn’t arrived yet.
But, despite a series of missteps, the stock has soared this year and investors were out cheering in full force after Perfect World Co., Ltd. (ADR) (NASDAQ:PWRD) released first-quarter results. The stock’s performance is pretty much in line with Chinese gaming stalwarts such as Giant Interactive Group Inc (ADR) (NYSE:GA) and NetEase, Inc (ADR) (NASDAQ:NTES) this year (and trading near its 52-week high), but the performance of the business is nowhere near.
Down once again
Revenue in the previous quarter dropped 12% to $100 million while earnings per share came in at $0.49, down 36% from last year. These numbers make for very bad year-over-year readings, but nevertheless, these were better than what analysts were expecting. But, will Perfect World Co., Ltd. (ADR) (NASDAQ:PWRD) finally turnaround and actually show some growth in its business?
Management hopes that growth is just around the corner. The company seems to have a decent enough pipeline and it has launched a number of games across various platforms this month apart from a few expansion packs. I’d pointed out before that Perfect World Co., Ltd. (ADR) (NASDAQ:PWRD) was suffering due to lack of new games, and as such, its recent launches would hopefully arrest the slide in revenue.
Better late than never
Perfect World is focused on mobile games, web games, and most importantly, MMO (massively multiplayer online) games. This month, it released a web game, Gourmet Adventurer, in China after releasing a number of web games in the previous quarter. The company plans to introduce more web games going forward and I believe that this is really important for its business.
The market for web games is pretty big and Perfect World’s competitor, Giant Interactive Group Inc (ADR) (NYSE:GA), is already making huge strides in this market. Giant is following a smart strategy of porting its successful MMO games into the web game format and has partnered with Qihoo 360 Technology Co Ltd (NYSE:QIHU) to distribute such games. The success of Giant’s games and the fact that it operates these games on the secure and expansive system of Qihoo is certainly helping it.
If Perfect World can cut its teeth into the web games market, then some of its revenue woes should ease down. Throw in the company’s efforts in developing mobile games and things might appear even better. Perfect World has launched three mobile games in China this month. Management accepts that they have been slow in venturing into mobile but is now serious about its mobile venture.
However, the market for mobile games is quite crowded and monetization isn’t as great as MMOs. For instance, Giant Interactive is already testing the waters in mobile, and if it ports its successful online games onto the platform, then competition would become even stiffer. Similarly, NetEase, Inc (ADR) (NASDAQ:NTES), which is among the biggest players in the industry, is much more serious about its mobile ideas.
Like Perfect World, even NetEase is going to launch quite a few mobile games this year, but it already has a strong foothold in the arena as it saw 75 million installations of its mobile games in the previous quarter. More importantly, NetEase boasted of 29 million daily active users, which is certainly impressive. Throw in other players such as Glu Mobile Inc. (NASDAQ:GLUU), and it becomes clear that Perfect World will have to bring it’s A game to have a chance in the market for mobile games.
Also, the company touts its MMO pipeline with games such as Swordsman Online, DOTA 2, and Holy King set to be launched going forward. Hopefully, its moves on all these fronts will bring the much needed revenue growth and enable the company to profit from the booming Chinese online gaming market.
The takeaway
Apart from these moves, Perfect World is continuing its expansion in Europe and Korea, which should strengthen the company’s overseas business further. Thus, the company’s important metrics might start picking up if it executes on all these fronts. And given the fact that Perfect World is still trading at a cheap 8.37 times trailing earnings despite being close to its 52-week high is indeed tempting as you wouldn’t be paying a lot for this probable turnaround story.
But then, this is not a stock you can buy and forget, because if Perfect World’s turnaround isn’t forthcoming over the next quarter or two, it would be prudent to book profits and move on.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Giant Interactive Group (NYSE:GA) and NetEase.com.
The article Is This Company’s Business About to Turnaround? originally appeared on Fool.com and is written by Harsh Chauhan.
Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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