Mobile Games, SNS Not Ready For Prime Time

Includes: GOMO, TCEHY
by: Doug Young

Techies have been buzzing about the huge potential of the mobile Internet for much of the last 2 years, but the latest headlines from social networking (SNS) giant Tencent (OTCPK:TCEHY, HKEx: 700) and recently listed mobile game developer Sungy Mobile (Nasdaq: GOMO) show the space is still rife with growing pains.

Tencent is discovering that its wildly popular WeChat mobile messaging service is attracting not only hundreds of millions of legitimate users, but also masses of spamsters and scam artists, and is trying to clean up the platform. Meanwhile, Sungy has just announced quarterly results that might look good for a company in any other space, but were clearly a disappointment for investors who were looking for meteoric growth.

These 2 separate stories highlight the huge expectation that many have for the mobile Internet, and the punishment companies can expect when they fail to live up to those big hopes. Let's start with Sungy, which was one of the first mobile Internet game companies to list when it made a Nasdaq IPO late last year at the height of a hugely positive window of investors sentiment.

Since the IPO, Sungy's shares have gradually lost their luster as broader sentiment toward these Chinese Internet firms has cooled somewhat. The company's shares fell another 9 percent in after-hours trade after it released its first-quarter results, ending at $12.65. That's still above its IPO share price of $11.22, but a far cry from their post-IPO high of nearly $32 reached earlier this year.

The results might look fairly respectable if Sungy didn't bear the burden of such huge expectation. The company's revenue rose a healthy 63 percent to 96.7 million ($15.6 million) in the first quarter (company announcement). Net income rose 24 percent to 14.2 million yuan, and would have risen an even stronger 82 percent excluding the impact of a recent acquisition. Investors were probably underwhelmed by the growth figures that were less than triple-digit, and Sungy's forecast that revenue growth in the current quarter would slow to about 28 percent probably didn't help.

Sungy's disappointing results come less than a week after another mobile game operator Chukong shelved its New York IPO plan, becoming the first major casualty of cooling sentiment towards Chinese Internet offerings (previous post). Shares of another recently listed mobile game developer, Forgame (HKEx: 484), have also done poorly since an initial surge after their IPO last October. The stock now trades at about HK$30, or well below its IPO price of HK$51 per share.

Frankly speaking, I'm not too surprised at the mixed fortune for these mobile game developers since their prospects probably are much more limited than investors initially realized. The traditional desktop online game business is similarly quite competitive, and these smaller developers will face growing competition not only from each other but also big names like Tencent and e-commerce leader Alibaba.

Speaking of Tencent, let's look quickly at the latest headlines that say China's SNS leader has launched a major cleanup on WeChat aimed at questionable public accounts and other problematic activity in the platform's popular "Moments" section, known in Chinese as pengyouquan. This new campaign looks like an expansion of a drive that began last year, which saw Tencent remove a number of public accounts from WeChat, leading some to call the move a form of censorship.

As part of the latest drive, WeChat is limiting users to no more than 5,000 friends, and is imposing other limits on some accounts. Perhaps a small portion of this activity is directed at political and other sensitive content. But the bigger aim in this campaign - which comes just weeks after a negative report on CCTV about fake ads on WeChat - is almost certainly the spamsters and fraudsters that are looking for new business among the service's 400 million active users. I doubt these negative elements will have a serious long-term impact on WeChat, but they do highlight the fact that the mobile Internet contains many risks in addition to its big potential rewards.

Bottom line: Shares of mobile game developers could quickly lose investor interest due to stiff competition, while mobile SNS is also likely to suffer from abuse by spamsters and fraudsters.

Disclosure: No positions

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