Great expectations for The9

Bear Stearns initiated coverage with an outperform rating today on Chinese online game operator and developer, The9 (ticker: NCTY). Bear estimates revenues to grow from $5.0 million in 2004 to $50.2 million in 2005. This is a courageous call. Here's why:

• Unusually high expectations. The9 will be releasing four games in 2005. World of Warcraft (WOW) is expected to be the blockbuster of the group. Though not yet released, Bear is relying only on positive initial responses in both the US and Korean gaming markets. They expect WOW to be launched in June 2005, and to break into the top five in China by year-end.
• High degree of revenue concentration in one game. Bear expects WOW, a game that has yet to be released, to contribute 65% of 2005 revenue.
• Potential for regulatory response. The Chinese government has executed a major crackdown of late. See China Bans 50 Electronic Games.
• Other disruptions. Network hackers and the proliferation of pirate servers represent risks that could disrupt and / or eat into The9's potential revenue.
• Competition. The9 joins a crowded field of online game companies in China including Shanda (ticker: SNDA). There have been reports that even News Corporation will be joining the fray. Can Microsoft (ticker: MSFT) be far behind?