Despite Shanda's Q2 Improvement, Uncertainties Linger

Sep.12.06 | About: Shanda Interactive (SNDA)

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

TRACKING THE NUMBERS: Shanda's New Gaming Strategy Is Winning Over Players, Analysts

  • Summary: Chinese on-line gaming company Shanda Interactive Entertainment continues to try and prove its "free to play" business model introduced in November 2005 is a success and is how best to capitalize on the Chinese market. Q1 was a disaster with net income tanking 95% to $1.47 million and revenue falling 31%. Q2 however, was a different story with net income 10x that of Q1 and revenue rising 21% to $46.8 million. Its business model originated in South Korea and is "a little like luxury goods for the virtual world" allowing players to buy weapon and accessory upgrades to enhance their game. A DB Securities analyst in Hong Kong upgraded Shanda last month to a "buy" with a $19 share price target despite his skepticism and inability to understand why Shanda has been successful. Credit Suisse has a "neutral" rating due to concern about the number of games in its pipeline. Shanda is also at work trying to boost sales of a web TV-like console it calls EZ Pod. Q2 sales grew sharply but the device faces a challenge from government regulation.
  • Comment on related stocks/ETFs: Shanda trades in the U.S. on the Nasdaq, ticker (NASDAQ:SNDA). Two of its local competitors mentioned in the article that trade in the U.S. are (NASDAQ:NTES) and The 9 (NASDAQ:NCTY). Shanda is currently trading about 51% off its 52-week high and 33% above its 52-week low. A majority of analysts that follow Shanda have a "hold" rating on it. Two major concerns for Shanda as the WSJ article mentions is eventual slowing of growth in new on-line gamers and as the DB analyst explained, it could be a "victim of its own success" because gamers willing to spend the most are almost certain they'll win, perhaps removing the losers from gaming (or a particular game) permanently. See Shanda's Q2 conference call transcript and an excerpt with Shanda's CEO explaining the firm's direct revenue growth. Also, Shanda's IR website and its Q2 financial results. Note that Q2 was a major improvement over Q1 but y-o-y both its revenues and net income were down double-digits. IRG Limited summarized Shanda's Q2 earnings mentioning that Shanda said its new business model is "cutting down on much illegal hacking" of its software.

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