Novice Investing - Nice Play by Shanda

Date: Monday 01st 2008f December 2008 05:16:25 PM

Nice Play by Shanda - 05/23/2007

By: Hari Wibowo

Another earning, another blowout for the online gaming operator, Shanda Interactive (SNDA). We have discussed that Shanda stock is poised to move higher if it posted better earnings each time. For the first quarter 2007, Shanda reported net earning of $ 0.36 per share, significantly higher than $ 0.30 per share the previous quarter. At this rate, Shanda will be earning $ 1.44 per share annually. Meanwhile, revenue increased 13.1% quarter over quarter to $ 68.8 Million. With this impressive growth, has Shanda reached its full potential?

On the surface things look good. However, share price has risen more than 100% over the past year to around $ 29 per share currently. Currently, Shanda has $ 50 M of positive net cash or $ 0.82 per share, barely making an impact for valuation purpose. Hence, let's figure out how much money Shanda can earn over the next few years. It apparently can grow earnings for the foreseeable future, in the clip of 30% each year before stabilizing afterwards. If that is the case, annual net earning two years from now will be $ 2.43 per share. Assigning a P/E of 16 as fair value, Shanda is fairly valued at $ 39.7 per share. With current price of $ 29 per share, that is about 37% below fair value if Shanda can continue its earning growth. That is a big' if' and we don't normally predict growth in fair value calculation.

It is interesting to watch Shanda as it unravels its free to play model to the world. Investors' skepticism had kept Shanda shares as low as $ 13 per share during the first few quarters of using free to play model. Five quarters after, Shanda had shown result by posting a decent earning per share profit figure.

You can draw the similarity of online game operators with pharmaceutical company. Operators like Shanda had to invest in R&D to come up with new exciting games to replenish good old games. When your pipeline is running dry, your earning will be hit temporarily. When all your blockbuster games are in place and are big hits, you would enjoy competitive advantage against other operators as you have created a sense of community amongst members. Right now, Shanda is towards its earning peak. The problem is figuring out how long it will stay on top.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Shanda Interactive Ltd. (SNDA) or any other securities.

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