In 4Q05, Shanda posted net loss due to the aging of its popular games Mir II, which accounted for 46% of online game revenue, adoption of a free-to-play and pay for in-game value-added services revenue model for three major MMORPGs, increased selling and marketing expenses for EZpod, and one time non-cash impairment charge of $64.6 million to reflect the declined value of its investment in Actoz. The new model hurt 4Q’s revenue, but the move is consistent with Shanda’s overall direction. The company licensed a new MMORPG, ArchLord. Along with Dungeons & Dragons, both games will add into MMORPGs’ pipeline. We expect online game revenues will be stabilized and regain growth in 2H06. The market for EZpad is still an uncertainty. At current price of $13.89, with an estimated valuation of $16.37 per share, the stock is fairly valued. We recommend HOLD.
In 4Q05, Shanda reported sales of approximately 83,700 sets of the EZ Pods, which generated $2.8 million in revenue. But how many of them arrived in users’ hands is not clear. The market is not educated and well informed, pickup in sales of EZPods still need to be seen. In the fast evolving market, Shanda moves ahead of its peers, but does it get ahead of its own step?
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