The9 is mostly known for operating World of Warcraft (WoW) in China for Blizzard Entertainment (ATVI) from 2005 to 2009. Its runaway success in operating WoW in China prompted Blizzard to pull the rug out from under The9 and re-cut a more profitable licensing deal for itself with NetEase (NTES). The loss of the WoW contract devastated shares of The9 and left the company looking for its next home run - enter Firefall.
Firefall, developed by Red5 Studios, is one of the hottest new Massively Multi-player Online Games and was recenty voted "#1 Most Anticipated MMOG in 2012" by Ten Ton Hammer's Readers' Choice Awards. With a sizable cash reserve from all the profits it made operating WoW, The9 purchased an 87% share in Red5 Studios in 2010. Red5 Studios is led by Mark Kern, who happens to be a previous team lead at Blizzard who was instrumental in developing World of Warcraft.
Getting back to The9's earnings call... CEO Jun Zhu mentioned early in the call that operating partners from around the world have been visiting Red5 Studios' headquarters to preview Firefall, and the feedback has been very positive. According to The9, they will operate Firefall themselves in China, but they plan to partner with game operators in other parts of the world to launch Firefall internationally. One such partner is Garena, who struck a deal with The9 in November of 2011 for the licensing rights to Firefall in Southeast Asia. According to various reports, the $23MM deal set a record for being one of the largest licensing deals for a AAA game in the Southeast Asia region, even possibly exceeding the comparable deals for WoW licenses in the region.
During the call's question/answer session, JPMorgan analyst Dick Wei asked about rumors about a possible Firefall licensing deal in Russia. The translator's initial response was that the company could not disclose any information about any potential deals. However, if you were listening to CEO Jun Zhu, you would have noticed that Zhu was genuinely surprised by the question, and in his surprise, responded (in Chinese), "how did you know about this?" This leads me to believe that there really is a deal on the horizon, and it could be announced very shortly. The translator did later state that negotiations with partners in Russia were in process.
Zhu also made comments regarding partners' interest in the game that were poorly translated. The translator stated "we are very glad there is strong interest from many markets, including Russia and Brazil, which gives us confidence in the sales of the game." If you listend to Zhu's comments in Chinese, a more literal translation was "there is strong interest from many markets, and they are using such a high price that it gives us great confidence to invest more in the game."
I realize that literal translation may not make a lot of sense, but my interpretation of it is that partners are bidding high prices for the licensing rights, which is giving The9 confidence to further invest in marketing the game. It would not surprise me to see record deals announced in other markets after the record deal struck in Southeast Asia.
Given the potential upcoming announcements of other international Firefall licensing deals, the recent pullback in the shares of The9 offers a great opportunity to purchase shares before the next run up. It is worth noting that when The9 announced its deal with Garena last November, the stock jumped from around $4.47/share to as high as $7.85 in five trading days. According to the Dec. 2011 balance sheet, cash per share is $6.96.
On March 28th, the stock closed at $6.17, so the downside looks limited, and the upside looks substantial. When The9 operated World of Warcraft in China and paid hefty royalties to Blizzard, the stock traded for over $50. With the world-wide rights to Firefall, The9 could be a 10-bagger from here given Firefall holds up to the hype.
Lastly, as a forgotten Chinese internet stock, The9 stands to gain from renewed attention to other Chinese internet stocks. Recent M&A activity between Youku (YOKU) and Tudou (TUDO), talks of Sina (SINA) monetizing its microblogging platform Weibo, rumors of Sohu (SOHU) planning to spin off its video streaming portal, surprise stellar earnings from Perfect World (PWRD), and rumors of Apple (AAPL) partnering with Baidu (BIDU) for search on iPhones and iPads in China has brought a lot of attention back to Chinese internet stocks in the past few weeks. Hopefully, a little of this attention will rub off onto The9 as it deserves a good look.
Disclosure: I am long NCTY.