Shares of Chinese gaming company The9 Limited (NCTY) have traded at depressed price levels since The9 lost the license to operate popular game World of Warcraft (WoW) in April 2009 (NCTY currently trades below $7 and below its cash per share.) I believe that The9's stock deserves a fresh look now because of strong performance of new game World of Fight (WoF).
WoF has remained a top-20 game since open beta, significantly outperforming market expectations. Prior to WoF's open beta, the market consensus was that WoF was just another poor clone of DNF, the most popular "side-scrolling fighting" game in China.
Most investors believed WoF will have similar performance to other DNF clones, which became mediocre games shortly after open beta. However, my research suggests that since entering open beta on January 8, WoF has consistently ranked among top 20 Chinese online games in terms of daily playing time, downloads, and search queries. The sustained strength of WoF indicates the game has outperformed investors' expectations by a big margin.
The9 stock's recent weakness was likely due to confusion over server count. I note that The9's stock has dropped more than 15% since January 8. I believe this is partly because some investors are concerned that WoF only has 13 server groups, which seem too low to support a popular game.
I suggest that investors use DNF as the benchmark: DNF currently has 116 server groups, and its peak concurrent users (PCU) reached 2.2 million in late November 2009. Considering DNF's sustained momentum, it's fair to estimate its PCU is currently 2 million. WoF has 13 server groups, and its server capacity and peak-time utilization are similar to DNF, based on my checks.
Using DNF's metrics as benchmarks, WoF's current PCU should be around 224K (=2 million*13/116). This number is sufficient to qualify WoF as a popular game in China, in my opinion.
Disclosure: No positions