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Perfect World's A Winner In The Gaming World
Posted: Nov 20, 2009 11:36 AM by Greg Sushinsky
Perfect World Co. Ltd. (Nasdaq:PWRD) online game developer and operator based in China, has been a mild sensation since it went public nine quarters ago. The company has beaten earnings estimates seven of these nine quarters, and has carved out an important place already in the gaming space in China. Perfect World is no small player, as it has a $2 billion market cap and aspirations to go global. (Learn more about market capitalization, Market Capitalization Defined.)
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A Good (if not Perfect) Third Quarter
Perfect World brought in $86.4 million in revenue, compared to $55.9 million the same quarter last year, and earned 81 cents per diluted ADR, or 86 cents per basic ADR excluding adjustments, versus 49 cents per share last year's third quarter. To show the trajectory of Perfect World's earnings growth, it pulled in $1.60 per share in 2008, is expected to hit $2.92 for the full year this year and $3.70 in 2010, according to consensus analyst estimates. Even cropping these quite a bit to be conservative, Perfect World is on a heady growth track.
Competition and Government Crackdown
So, what could spoil the party for Perfect World? Ah, it's China, so no need to look further than the government. China has already restricted access of foreign companies licensing online games in China, such as World of Warcraft, on which NetEase (Nasdaq:NTES) had partnered with Activision Blizzard (Nasdaq:ATVI), to market in China. The ban on foreign content for video games in China has not been consistently applied prior to this, so it's an uncertainty investors should consider.
Also, there are many thriving online gaming companies in China, with multiplayer video gaming not only popular, but a near addiction for many players. There is even some concern by one of the highly successful companies, Shanda Interactive (Nasdaq:SNDA) and its gaming spinoff Shanda Game (Nasdaq:GAME), that it has in part caused or contributed highly to this "player addiction."
The gaming space is fiercely contested by such companies as The 9 Ltd., (Nasdaq:NCTY), which pursues traditional online video gaming and once featured World of Warcraft, before the ban. There are many more companies, large and small, vying for a piece of the seemingly endless China gaming pie. While of course it can't be an endless growth market (can it?), whether anybody is going to get elbowed out of this industry already in the near term is another risk. Perfect World and others have also already expanded their content to elsewhere in Asia, Europe and definitely have eyes on North America
Online Explosion
One thing is clear when looking at the online gaming picture in China, the companies involved are vigorous and robust, producing content that is hungrily snapped up by an eager audience. This is not the case with, for example, Electronic Arts (Nasdaq:ERTS), the U.S. video game maker, with products that appear to be tired by comparison. Whether the different cultural play of Asian-oriented themes or multiplayer games will eventually catch on in or be successfully adapted for the U.S. market is another question, but there is still plenty of room in China and globally in markets that snap up the multiplayer games. These should continue to be fertile markets for expansion by Perfect World and the others for a long time. Perfect World, which looks like it's building its strength for the long haul, is a stock worth a look in an admittedly speculative industry in a volatile market.
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By Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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