However, Shanda Games Limited(ADR) (NASDAQ:GAME) has done its best to disappoint on all those fronts over the past one year, and it’s not surprising that the stock is down almost 20% from where it was a year ago. However, shares of the company recently received a shot in the arm, rising 15% in a day after it reported better than expected first-quarter results recently.
Hunting for positives
Don’t get too excited over the “better than expected” part, as revenue was down 22% from last year to $173 million and earnings declined 28% from last year to $43.9 million, or $0.16 per share. Nevertheless, these results were in line with what analysts expected, giving shareholders a much needed reason to bid up the stock after what seemed literally ages.
But then, was the pop really justified? Were there some positive cues in the report that led to optimism about Shanda Games Limited(ADR) (NASDAQ:GAME)’s future? Well, there were some, which sent investors on a buying spree as they didn’t want to miss out on a stock trading at just 5.5 times trailing earnings and 4.9 times forward earnings.
Will mobile be a savior?
For instance, Shanda Games Limited(ADR) (NASDAQ:GAME) has been making rapid progress in mobile games, revenue from which was $17 million in the quarter as compared to none in the year-ago period. This is certainly an impressive rate of growth as mobile gaming could be one of the primary drivers of Shanda’s growth at this pace. Most importantly, its mobile games have been accepted well as Million Arthur, one of its games, was among the top grossers (ranked fifth) on Google Play in March.
An important point which shouldn’t be missed is that Shanda will launch this game in China next month, which means that there’s scope for a lot of revenue growth given the size of the Middle Kingdom. The company has lined up a number of mobile games going forward, including the mobile version of the popular Dragon Nest and has penned a partnership with well-known game publisher Square Enix.
MMO needs to improve
Shanda Games Limited(ADR) (NASDAQ:GAME)’s mobile advancements seem quite impressive, but it needs to arrest the slide in its massively multiplayer online (MMO) games that are its primary bread and butter right now. MMO revenue has been declining, and the story was no different in the previous quarter. The drop was led by declines in the number of active and paying users.
However, things might get better going forward as the drop was a result of Chinese New Year holidays and the anticipated launch of an expansion pack for one of its games, which was released in April. In addition, Shanda would be looking to use its mobile growth to promote MMO games and increase the user base. Shanda is expected to release more content for its top games in an effort to salvage its free-falling MMO business and is looking at the international markets for growth as well.
Revenue from new games, such as AION version 4.0, which was launched recently, is expected to pick up going forward. It looks like all these positives provided fodder to the bulls and shares spiked. However, Shanda Games Limited(ADR) (NASDAQ:GAME) needs to overcome competition from the likes of Giant Interactive Group Inc (ADR) (NYSE:GA) and make sure that its mobile business does not go the way of Glu Mobile Inc. (NASDAQ:GLUU).
Competition is strong
Giant Interactive Group Inc (ADR) (NYSE:GA) is one of the stalwarts in the Chinese gaming industry, and the stickiness factor of its games seems to be high. The company has been expanding itself into various online gaming formats and mobile as well. Giant Interactive Group Inc (ADR) (NYSE:GA)’s expertise and solid execution has already pushed Shanda behind in the online gaming market in China, and Shanda would need to be at its best to stave off competition in mobile.
And as I said, Shanda’s mobile strategy looks good now, but it would do itself a favor by looking at the failings of Glu Mobile Inc. (NASDAQ:GLUU) and learn from them. Glu was, once upon a time, a pioneer in the mobile gaming industry, but it seems to have lost its focus. As a result, the company’s mobile games aren’t as good as they used to be (in my personal opinion) as the company is hunting for riches in real money gambling.
However, Glu Mobile Inc. (NASDAQ:GLUU) is still a revered name in the mobile gaming arena and it’s trying new strategies such as a Games as a Service (GaaS) model, which seems to be working to some extent. Given Glu’s expertise in mobile games, it still poses a threat to Shanda Games Limited(ADR) (NASDAQ:GAME) as it saw its average revenue per daily active user triple in the previous quarter, which means that Glu’s strategy might be working.
The bottom line
Shanda Games Limited(ADR) (NASDAQ:GAME) has had a pretty tough time and has underperformed its peers this year. Falling revenue, declining earnings, and erosion of its user base are some solid reasons why you shouldn’t invest in the stock. But then, a dirt-cheap valuation and glimmer of hope in its mobile and online gaming businesses might be good reasons why you could initiate a long position in the company.
The article Is This Cheap Stock Finally Going to Fly? originally appeared on Fool.com and is written by Harsh Chauhan.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Giant Interactive Group. 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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